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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2003
COMMISSION FILE NO. 1-13038
CRESCENT REAL ESTATE EQUITIES COMPANY
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(Exact name of registrant as specified in its charter)
TEXAS 52-1862813
- -------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
777 Main Street, Suite 2100, Fort Worth, Texas 76102
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code (817) 321-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such report) and (2) has been subject to such filing
requirements for the past ninety (90) days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Number of shares outstanding of each of the registrant's classes of preferred
and common shares, as of November 3, 2003.
Series A Convertible Cumulative Preferred Shares, par value $0.01 per share: 10,800,000
Series B Cumulative Redeemable Preferred Shares, par value $0.01 per share: 3,400,000
Common Shares, par value $0.01 per share: 99,249,899
CRESCENT REAL ESTATE EQUITIES COMPANY
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 (unaudited) and December 31, 2002
(unaudited)........................................................................... 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 (unaudited)............................................... 4
Consolidated Statement of Shareholders' Equity for the nine months ended
September 30, 2003 (unaudited)........................................................ 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003
and 2002 (unaudited).................................................................. 6
Notes to Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................... 39
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 65
Item 4. Controls and Procedures............................................................... 65
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................. 66
Item 6. Exhibits and Reports on Form 8-K...................................................... 66
PART I
ITEM 1. FINANCIAL STATEMENTS
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
ASSETS:
Investments in real estate:
Land $ 315,479 $ 292,970
Building and improvements, net of accumulated depreciation of $734,370 and
$655,168 at September 30, 2003 and December 31, 2002, respectively 2,201,657 2,185,070
Furniture, fixtures and equipment, net of accumulated depreciation of
$69,487 and $58,468 at September 30, 2003 and December 31, 2002, respectively 62,682 56,682
Land held for investment or development 470,813 447,778
Properties held for disposition, net 87,701 116,336
-------------- --------------
Net investment in real estate $ 3,138,332 $ 3,098,836
Cash and cash equivalents $ 63,483 $ 78,444
Restricted cash and cash equivalents 106,675 105,786
Accounts receivable, net 39,966 42,046
Deferred rent receivable 62,474 60,973
Investments in unconsolidated companies 543,259 562,643
Notes receivable, net 108,971 115,494
Income tax asset-current and deferred, net 54,496 39,709
Other assets, net 180,273 184,468
-------------- --------------
Total assets $ 4,297,929 $ 4,288,399
============== ==============
LIABILITIES:
Borrowings under Credit Facility $ 314,500 $ 164,000
Notes payable 2,261,969 2,218,910
Accounts payable, accrued expenses and other liabilities 351,264 375,902
-------------- --------------
Total liabilities $ 2,927,733 $ 2,758,812
-------------- --------------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTERESTS:
Operating partnership, 8,873,347 and 8,878,342 units, at September 30, 2003
and December 31, 2002, respectively $ 109,181 $ 130,802
Consolidated real estate partnerships 37,694 43,972
-------------- --------------
Total minority interests $ 146,875 $ 174,774
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred shares, $0.01 par value, authorized 100,000,000 shares:
Series A Convertible Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
10,800,000 shares issued and outstanding
at September 30, 2003 and December 31, 2002 $ 248,160 $ 248,160
Series B Cumulative Preferred Shares,
liquidation preference of $25.00 per share,
3,400,000 shares issued and outstanding
at September 30, 2003 and December 31, 2002 81,923 81,923
Common shares, $0.01 par value, authorized 250,000,000 shares,
124,298,763 and 124,280,867 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively 1,236 1,236
Additional paid-in capital 2,243,384 2,243,419
Deferred compensation on restricted shares (5,253) (5,253)
Accumulated deficit (868,397) (728,060)
Accumulated other comprehensive income (loss) (17,492) (27,252)
-------------- --------------
$ 1,683,561 $ 1,814,173
Less - shares held in treasury, at cost, 25,127,388 and 25,068,759
common shares at September 30, 2003 and December 31, 2002, respectively (460,240) (459,360)
-------------- --------------
Total shareholders' equity $ 1,223,321 $ 1,354,813
-------------- --------------
Total liabilities and shareholders' equity $ 4,297,929 $ 4,288,399
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
3
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUE:
Office Property $ 127,044 $ 140,840 $ 375,996 $ 411,067
Resort/Hotel Property 54,769 56,110 170,122 148,157
Residential Development Property 29,808 41,832 119,380 168,372
--------- --------- ---------- ---------
Total Property revenue 211,621 238,782 665,498 727,596
--------- --------- ---------- ---------
EXPENSE:
Office Property real estate taxes 15,523 17,229 50,663 56,690
Office Property operating expenses 43,976 42,624 129,116 124,613
Resort/Hotel Property expense 44,926 44,599 137,325 110,701
Residential Development Property expense 29,723 39,306 110,483 152,983
--------- --------- ---------- ---------
Total Property expense 134,148 143,758 427,587 444,987
--------- --------- ---------- ---------
Income from Property Operations 77,473 95,024 237,911 282,609
--------- --------- ---------- ---------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 11,334 5,452 12,961 5,528
Gain on joint venture of properties, net - 17,710 100 17,710
Interest and other income 1,319 1,775 4,172 5,833
Corporate general and administrative (7,926) (8,121) (20,526) (19,846)
Interest expense (43,044) (47,121) (129,298) (135,678)
Amortization of deferred financing costs (2,783) (2,701) (7,751) (7,722)
Depreciation and amortization (37,728) (36,726) (110,947) (101,914)
Impairment charges related to real estate assets - - (1,200) (1,000)
Other expenses (130) - (1,042) -
Equity in net income (loss) of unconsolidated companies:
Office Properties 5,475 874 8,797 3,655
Resort/Hotel Properties (89) (91) 2,036 (91)
Residential Development Properties 1,725 4,272 4,235 22,934
Temperature-Controlled Logistics Properties (949) (3,101) 152 (3,828)
Other (864) (755) (1,679) (5,281)
--------- --------- ---------- ---------
Total Other Income (Expense) (73,660) (68,533) (239,990) (219,700)
--------- --------- ---------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES 3,813 26,491 (2,079) 62,909
Minority interests (1,582) (4,235) (1,897) (16,207)
Income tax benefit 4,940 2,534 10,545 6,543
--------- --------- ---------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 7,171 24,790 6,569 53,245
Net (loss) income from discontinued operations, net of
minority interests (1,884) 1,511 1,080 4,542
(Loss) gain on real estate from discontinued operations, net
of minority interests (2,017) 1,448 (16,612) 5,046
Cumulative effect of a change in accounting principle - - - (9,172)
--------- --------- ---------- ---------
NET INCOME (LOSS) 3,270 27,749 (8,963) 53,661
Series A Preferred Share distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred Share distributions (2,019) (2,019) (6,057) (3,028)
--------- --------- ---------- ---------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS $ (3,305) $ 21,174 $ (28,688) $ 38,487
========= ========= ========== =========
BASIC EARNINGS PER SHARE DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.01 $ 0.18 $ (0.13) $ 0.37
Net (loss) income from discontinued operations, net of
minority interests (0.02) 0.01 0.01 0.04
(Loss) gain on real estate from discontinued operations, net
of minority interests (0.02) 0.01 (0.17) 0.05
Cumulative effect of a change in accounting principle - - - (0.09)
--------- --------- ---------- ---------
Net (loss) income- basic $ (0.03) $ 0.20 $ (0.29) $ 0.37
========= ========= ========== =========
DILUTED EARNINGS PER SHARE DATA:
Net income (loss) before discontinued operations and
cumulative effect of a change in accounting principle $ 0.01 $ 0.18 $ (0.13) $ 0.37
Net (loss) income from discontinued operations, net of
minority interests (0.02) 0.01 0.01 0.04
(Loss) gain on real estate from discontinued operations, net
of minority interests (0.02) 0.01 (0.17) 0.05
Cumulative effect of a change in accounting principle - - - (0.09)
--------- --------- ---------- ---------
Net (loss) income - diluted $ (0.03) $ 0.20 $ (0.29) $ 0.37
========= ========= ========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(dollars in thousands)
(unaudited)
Series A Series B
Preferred Shares Preferred Shares Treasury Shares
---------------------- -------------------- -----------------------
Shares Net Value Shares Net Value Shares Net Value
---------- ---------- --------- --------- ---------- -----------
SHAREHOLDERS' EQUITY, December 31, 2002 10,800,000 $ 248,160 3,400,000 $ 81,923 25,068,759 $ (459,360)
Issuance of Common Shares - - - - - -
Accretion of Discount on Employee
Stock Option Notes - - - - - -
Issuance of Shares in Exchange for Operating
Partnership Units - - - - - -
Stock Option Grants - - - - - -
Share Purchase under Compensation Plan - - - - 58,629 (880)
Dividends Paid - - - - - -
Net (Loss) Income Available to Common Shareholders - - - - - -
Unrealized Gain on Marketable Securities - - - - - -
Unrealized Net Gain on Cash Flow Hedges - - - - - -
---------- ---------- --------- -------- ---------- ----------
SHAREHOLDERS' EQUITY, September 30, 2003 10,800,000 $ 248,160 3,400,000 $ 81,923 25,127,388 $ (460,240)
========== ========== ========= ======== ========== ==========
Deferred Accumulated
Common Shares Additional Compensation Other
---------------------- Paid-in on Restricted Accumulated Comprehensive
Shares Par Value Capital Shares (Deficit) Income
----------- --------- ------------ ----------- ----------- ------------
SHAREHOLDERS' EQUITY, December 31, 2002 124,280,867 $ 1,236 $ 2,243,419 $ (5,253) $ (728,060) $ (27,252)
Issuance of Common Shares 7,906 - 126 - - -
Accretion of Discount on Employee
Stock Option Notes - - (189) - - -
Issuance of Shares in Exchange for Operating
Partnership Units 9,990 - 8 - - -
Stock Option Grants - - 20 - - -
Share Purchase under Compensation Plan - - - - - -
Dividends Paid - - - - (111,649) -
Net (Loss) Income Available to Common Shareholders - - - - (28,688) -
Unrealized Gain on Marketable Securities - - - - - 3,761
Unrealized Net Gain on Cash Flow Hedges - - - - - 5,999
----------- --------- ------------ ---------- ---------- -----------
SHAREHOLDERS' EQUITY, September 30, 2003 124,298,763 $ 1,236 $ 2,243,384 $ (5,253) $ (868,397) $ (17,492)
=========== ========= ============ ========== ========== ===========
Total
------------
SHAREHOLDERS' EQUITY, December 31, 2002 $ 1,354,813
Issuance of Common Shares 126
Accretion of Discount on Employee
Stock Option Notes (189)
Issuance of Shares in Exchange for Operating
Partnership Units 8
Stock Option Grants 20
Share Purchase under Compensation Plan (880)
Dividends Paid (111,649)
Net (Loss) Income Available to Common Shareholders (28,688)
Unrealized Gain on Marketable Securities 3,761
Unrealized Net Gain on Cash Flow Hedges 5,999
------------
SHAREHOLDERS' EQUITY, September 30, 2003 $ 1,223,321
============
The accompanying notes are an integral part of these consolidated
financial statements.
5
CRESCENT REAL ESTATE EQUITIES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,963) $ 53,661
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 118,698 109,636
Residential Development cost of sales 66,658 114,039
Residential Development capital expenditures (98,506) (65,958)
Discontinued operations - (loss) gain on real estate, net of minority interests 16,612 (5,046)
Discontinued operations - depreciation and minority interests 6,944 7,383
Impairment charges related to real estate assets 1,200 1,000
Income from investment in land sales, net (12,961) (5,528)
Gain on joint venture of properties, net (100) (17,710)
Minority interests 1,897 16,207
Cumulative effect of a change in accounting principle - 9,172
Non-cash compensation (43) 1,990
Distributions received in excess of earnings from unconsolidated companies:
Office Properties 239 -
Resort/Hotel Properties - 416
Temperature-Controlled Logistics Properties - 7,828
Other 2,531 6,255
Equity in (earnings) loss net of distributions received from unconsolidated
companies:
Office Properties - (990)
Resort/Hotel Properties (2,036) -
Residential Development Properties (4,189) (9,642)
Temperature-Controlled Logistics Properties (152) -
Change in assets and liabilities, net of consolidations and acquisitions:
Restricted cash and cash equivalents 602 2,771
Accounts receivable 4,824 11,647
Deferred rent receivable (1,501) 4,508
Income tax asset - current and deferred (11,223) (15,339)
Other assets 4,502 7,856
Accounts payable, accrued expenses and other liabilities (29,395) (57,128)
--------- ---------
Net cash provided by operating activities $ 55,638 $ 177,028
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash impact of DBL consolidation/COPI transaction $ 11,374 $ 38,226
Proceeds from property sales 16,030 76,582
Proceeds from joint venture partner - 164,067
Acquisition of rental properties (14,802) (97,373)
Development of investment properties (3,612) (1,669)
Property improvements - Office Properties (11,342) (11,619)
Property improvements - Resort/Hotel Properties (7,097) (13,720)
Tenant improvement and leasing costs - Office Properties (51,114) (36,602)
Residential Development Properties Investments (28,696) (21,910)
(Increase) decrease in restricted cash and cash equivalents (835) 12,668
Return of investment in unconsolidated companies:
Office Properties 7,721 1,660
Residential Development Properties 227 10,011
Temperature-Controlled Logistics Properties 3,201 -
Other 5,428 -
Investment in unconsolidated companies:
Office Properties (85) -
Residential Development Properties (4,738) (27,732)
Temperature-Controlled Logistics Properties (897) (242)
Other (1,419) (425)
Decrease (increase) in notes receivable 19,098 (7,820)
--------- ---------
Net cash (used in) provided by investing activities $ (61,558) $ 84,102
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing costs $ (2,603) $ (8,591)
Borrowings under Credit Facility 284,500 372,000
Payments under Credit Facility (134,000) (476,000)
Notes payable proceeds 100,435 375,000
Notes payable payments (97,164) (171,549)
Residential Development Properties notes payable borrowings 57,516 54,698
Residential Development Properties notes payable payments (56,042) (84,856)
Purchase of GMAC preferred interest - (218,423)
Capital distributions - joint venture partner (9,462) (4,451)
Capital distributions - joint venture preferred equity - (6,967)
Proceeds from exercise of share options - 353
Treasury shares purchase under compensation plan (880) -
Common share repurchases held in Treasury - (28,347)
Issuance of preferred shares - Series A - 48,160
Issuance of preferred shares - Series B - 81,923
Series A Preferred Share distributions (13,668) (12,146)
Series B Preferred Share distributions (6,057) (3,028)
Dividends and unitholder distributions (131,616) (132,549)
--------- ---------
Net cash used in financing activities $ (9,041) $(214,773)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (14,961) $ 46,357
CASH AND CASH EQUIVALENTS,
Beginning of period 78,444 36,285
--------- ---------
CASH AND CASH EQUIVALENTS,
End of Period $ 63,483 $ 82,642
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Crescent Real Estate Equities Company ("Crescent Equities") operates as
a real estate investment trust for federal income tax purposes (a "REIT") and,
together with its subsidiaries, provides management, leasing and development
services for some of its properties.
The term "Company" includes, unless the context otherwise indicates,
Crescent Equities, a Texas real estate investment trust, and all of its direct
and indirect subsidiaries.
The direct and indirect subsidiaries of Crescent Equities at September
30, 2003 included:
- CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP
The "Operating Partnership."
- CRESCENT REAL ESTATE EQUITIES, LTD.
The "General Partner" of the Operating Partnership.
- SUBSIDIARIES OF THE OPERATING PARTNERSHIP AND THE
GENERAL PARTNER
Crescent Equities conducts all of its business through the Operating
Partnership and its other subsidiaries. The Company is structured to facilitate
and maintain the qualification of Crescent Equities as a REIT.
The following table shows the consolidated subsidiaries of the Company
that owned or had an interest in real estate assets and the real estate assets
that each subsidiary owned or had an interest in as of September 30, 2003.
Operating Partnership Wholly-owned assets - The Avallon IV,
Datran Center (two office properties),
Houston Center (three office properties and
the Houston Center Shops). These properties
are included in the Company's Office Segment.
Joint Venture assets, consolidated - 301
Congress Avenue (50% interest) and The
Woodlands Office Properties (85.6% interest)
(four office properties). These properties
are included in the Company's Office Segment.
Sonoma Mission Inn & Spa (80.1% interest),
included in the Company's Resort/Hotel
Segment.
Non wholly-owned assets, unconsolidated -
Bank One Center (50% interest), Bank One
Tower (20% interest), Three Westlake Park
(20% interest), Four Westlake Park (20%
interest), Miami Center (40% interest), 5
Houston Center (25% interest) and Five Post
Oak Park (30% interest). These properties are
included in the Company's Office Segment.
Ritz Carlton Palm Beach (50% interest),
included in the Company's Resort/Hotel
Segment. The temperature-controlled logistics
properties (40% interest in 87 properties).
These properties are included in the
Company's Temperature-Controlled Logistics
Segment.
Crescent Real Estate Wholly-owned assets - The Aberdeen, The
Funding I, L.P. ("Funding Avallon I, II & III, Carter Burgess Plaza,
I") The Citadel, The Crescent Atrium, The
Crescent Office Towers, Regency Plaza One,
Waterside Commons and 125 E. John Carpenter
Freeway. These properties are included in the
Company's Office Segment.
Crescent Real Estate Wholly-owned assets - Albuquerque Plaza,
Funding II, L.P. ("Funding Barton Oaks Plaza One, Briargate Office and
II") Research Center, Las Colinas Plaza, Liberty
Plaza I & II, MacArthur Center I & II,
Ptarmigan Place, Stanford Corporate Centre,
Two Renaissance Square and 12404 Park
Central. These properties are included in the
Company's Office Segment. The Hyatt Regency
Albuquerque and the Park Hyatt Beaver Creek
Resort & Spa. These properties are included
in the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Greenway Plaza Office
Funding III, IV and V, Properties (ten office properties). These
L.P. ("Funding III, IV properties are included in the Company's
and V")(1) Office Segment. Renaissance Houston Hotel is
included in the Company's Resort/Hotel
Segment.
Crescent Real Estate Wholly-owned asset - Canyon Ranch - Lenox,
Funding VI, L.P. included in the Company's Resort/Hotel
("Funding VI") Segment.
Crescent Real Estate Wholly-owned assets - Four behavioral
Funding VII, L.P. healthcare properties.
("Funding VII")
7
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crescent Real Estate Wholly-owned assets - The Addison, Addison
Funding VIII, L.P. Tower, Austin Centre, The Avallon V,
("Funding VIII") Chancellor Park, Frost Bank Plaza, Greenway I
and IA (two office properties), Greenway II,
Johns Manville Plaza, Palisades Central I,
Palisades Central II, Stemmons Place,
Trammell Crow Center(2), 3333 Lee Parkway,
1800 West Loop South, 5050 Quorum, 44 Cook
and 55 Madison. These properties are included
in the Company's Office Segment. The Canyon
Ranch - Tucson, Omni Austin Hotel, and
Ventana Inn & Spa, all of which are included
in the Company's Resort/Hotel Segment.
Crescent 707 17th Street, Wholly-owned assets - 707 17th Street,
L.L.C. included in the Company's Office Segment, and
The Denver Marriott City Center, included in
the Company's Resort/Hotel Segment.
Crescent Real Estate Wholly-owned assets - Fountain Place and
Funding X, L.P. ("Funding Post Oak Central (three office properties),
X") all of which are included in the Company's
Office Segment.
Crescent Spectrum Center, Wholly-owned asset - Spectrum Center,
L.P. included in the Company's Office Segment.
Crescent Colonnade, Wholly-owned asset - The BAC-Colonnade
L.L.C. Building ("The Colonnade"), included in the
Company's Office Segment.
Mira Vista Development Non wholly-owned asset, consolidated - Mira
Corp. ("MVDC") Vista (98% interest), included in the
Company's Residential Development Segment.
Houston Area Development Non wholly-owned assets, consolidated -
Corp. ("HADC") Falcon Point (98% interest), Falcon Landing
(98% interest) and Spring Lakes (98%
interest). These properties are included in
the Company's Residential Development
Segment.
Desert Mountain Non wholly-owned asset, consolidated -
Development Corporation Desert Mountain (93% interest), included in
("DMDC") the Company's Residential Development
Segment.
The Woodlands Land Non wholly-owned asset, unconsolidated -
Company ("TWLC") The Woodlands (42.5% interest)(3), included
in the Company's Residential Development
Segment.
Crescent Resort Non wholly-owned assets, consolidated - Eagle
Development Inc. Ranch (60% interest), Main Street Junction
("CRDI") (30% interest), Main Street Station (30%
interest), Main Street Station Vacation Club
(30% interest), Riverbend (60% interest),
Park Place at Riverfront (64% interest), Park
Tower at Riverfront (64% interest), Delgany
Lofts (64% interest), Promenade Lofts at
Riverfront (64% interest), Creekside at
Riverfront (64% interest), Cresta (60%
interest), Snow Cloud (64% interest), Horizon
Pass Lodge (64% interest), One Vendue Range
(62% interest), Old Greenwood (71.2%
interest), Tahoe Mountain Resorts (57% -
71.2% interest). These properties are
included in the Company's Residential
Development Segment.
Non wholly-owned assets, unconsolidated -
Blue River Land Company, L.L.C. - Three
Peaks (30% interest), included in the
Company's Residential Development Segment.
Crescent TRS Holdings Non wholly-owned assets, unconsolidated -
Corp. two quarries (56% interest). These properties
are included in the Company's
Temperature-Controlled Logistics Segment.
- --------------
(1) Funding III owns nine of the ten office properties in the
Greenway Plaza office portfolio and the Renaissance Houston
Hotel; Funding IV owns the central heated and chilled water plant
building located at Greenway Plaza; and Funding V owns 9
Greenway, the remaining office property in the Greenway Plaza
office portfolio.
(2) The Company owns the principal economic interest in Trammell Crow
Center through its ownership of fee simple title to the property
(subject to a ground lease and a leasehold estate regarding the
building) and two mortgage notes encumbering the leasehold
interests in the land and the building.
(3) Distributions are made to partners based on specified payout
percentages. During the nine months ended September 30, 2003, the
Company's payout percentage and economic interest were 52.5%.
See Note 8, "Investments in Unconsolidated Companies," for a
table that lists the Company's ownership in significant unconsolidated joint
ventures and investments as of September 30, 2003.
See Note 9, "Notes Payable and Borrowings Under Credit Facility,"
for a list of certain other subsidiaries of the Company, all of which are
consolidated in the Company's financial statements and were formed primarily for
the purpose of obtaining secured debt or joint venture financing.
8
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The assets and operations of the Company were divided into four
investment segments at September 30, 2003, as follows:
- Office Segment;
- Resort/Hotel Segment;
- Residential Development Segment; and
- Temperature-Controlled Logistics Segment.
Within these segments, the Company owned in whole or in part the
following real estate assets (the "Properties") as of September 30, 2003:
- OFFICE SEGMENT consisted of 74 office properties, including three
retail properties (collectively referred to as the "Office
Properties"), located in 26 metropolitan submarkets in six
states, with an aggregate of approximately 29.7 million net
rentable square feet. 62 of the Office Properties are
wholly-owned and 12 are owned through joint ventures, five of
which are consolidated and seven of which are unconsolidated.
- RESORT/HOTEL SEGMENT consisted of six luxury and destination
fitness resorts and spas with a total of 1,306 rooms/guest nights
and four upscale business-class hotel properties with a total of
1,771 rooms (collectively referred to as the "Resort/Hotel
Properties"). Eight of the Resort/Hotel Properties are
wholly-owned, one is owned through a joint venture that is
consolidated, and one is owned through a joint venture that is
unconsolidated.
- RESIDENTIAL DEVELOPMENT SEGMENT consisted of the Company's
ownership of real estate mortgages and voting and non-voting
common stock representing interests of 98% to 100% in five
residential development corporations (collectively referred to as
the "Residential Development Corporations"), which in turn,
through partnership arrangements, owned in whole or in part 23
upscale residential development properties, 21 of which are
consolidated and two of which are unconsolidated (collectively
referred to as the "Residential Development Properties").
- TEMPERATURE-CONTROLLED LOGISTICS SEGMENT consisted of the
Company's 40% interest in Vornado Crescent Portland Partnership
(the "Temperature-Controlled Logistics Partnership") and a 56%
interest in the Vornado Crescent Carthage and KC Quarry L.L.C.
The Temperature-Controlled Logistics Partnership owns all of the
common stock, representing substantially all of the economic
interest, of AmeriCold Corporation (the "Temperature-Controlled
Logistics Corporation"), a REIT. As of September 30, 2003, the
Temperature-Controlled Logistics Corporation directly or
indirectly owned 87 temperature-controlled logistics properties
(collectively referred to as the "Temperature-Controlled
Logistics Properties") with an aggregate of approximately 440.7
million cubic feet (17.5 million square feet) of warehouse space.
As of September 30, 2003, the Vornado Crescent Carthage and KC
Quarry, L.L.C. owned two quarries and the related land. The
Company accounts for its interests in the Temperature-Controlled
Logistics Partnership and in the Vornado Crescent Carthage and KC
Quarry L.L.C. as unconsolidated equity investments.
See Note 3, "Segment Reporting," for a table showing income from
property operations, total other income and expenses, equity in net income
(loss) of unconsolidated companies and funds from operations for each of these
investment segments for the three and nine months ended September 30, 2003 and
2002, and total assets, consolidated property level financing, consolidated
other liabilities, and minority interests for each of these investment segments
at September 30, 2003 and December 31, 2002.
For purposes of segment reporting as defined in Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information," and this Quarterly Report on Form 10-Q, the
Resort/Hotel Properties, the Residential Development Properties and the
Temperature-Controlled Logistics Properties are considered three separate
reportable segments, as described above. However, for purposes of investor
communications, the Company classifies its luxury and destination fitness
resorts and spas and Residential Development Properties as a single group
referred to as the "Resort and Residential Development Sector" due to the
similar characteristics of targeted customers. This group does not contain the
four business-class hotel properties. Instead, for investor communications, the
four business-class hotel properties are classified with the
Temperature-Controlled Logistics Properties as the Company's "Investment
Sector."
9
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP") for interim financial information, as well as in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
information and footnotes required by GAAP for complete financial statements are
not included. In management's opinion, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
unaudited interim financial statements are included. Operating results for
interim periods reflected do not necessarily indicate the results that may be
expected for a full fiscal year. You should read these financial statements in
conjunction with the financial statements and the accompanying notes included in
the Company's Form 10-K for the year ended December 31, 2002.
Certain amounts in prior period financial statements have been
reclassified to conform to current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section should be read in conjunction with the more detailed
information regarding the Company's significant accounting policies contained in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS NO. 145. In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of FASB Statements 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145
requires the reporting of gains and losses from early extinguishment of debt be
included in the determination of net income unless criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations," which
allows for extraordinary item classification, are met. The provisions of this
Statement related to the rescission of Statement No. 4 are to be applied in
fiscal years beginning after May 15, 2002. The Company adopted this Statement
for fiscal year 2003 and expects no impact in 2003 beyond the classification of
costs related to early extinguishments of debt, which were shown in the
Company's 2001 Consolidated Statements of Operations as an extraordinary item.
SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
effective for fiscal years ending after December 15, 2002, to amend the
transition and disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." In addition to the prospective transition method of
accounting for Stock-Based Employee Compensation using the fair value method
provided in SFAS No. 123, SFAS No. 148 permits two additional transition
methods, both of which avoid the ramp-up effect arising from prospective
application of the fair value method. The Retroactive Restatement Method
requires companies to restate all periods presented to reflect the Stock-Based
Employee Compensation under the fair value method for all employee awards
granted, modified, or settled in fiscal years beginning after December 15, 1994.
The Modified Prospective Method requires companies to recognize Stock-Based
Employee Compensation from the beginning of the fiscal year in which the
recognition provisions are first applied as if the fair value method in SFAS No.
123 had been used to account for employee awards granted, modified, or settled
in fiscal years beginning after December 15, 1994. Also, in the absence of a
single accounting method for Stock-Based Employee Compensation, SFAS No. 148
expands disclosure requirements from those existing in SFAS No. 123, and
requires disclosure of whether, when, and how an entity adopted the preferable,
fair value method of accounting.
Effective January 1, 2003, the Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. During the nine months
ended September 30, 2003, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's common shares at the date of grant over the exercise
price of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. During the nine months ended
September 30, 2003, no compensation cost was recognized for grants of stock
options made prior to 2003 under the Company stock option plans ("the Plans")
because the Company's policy is to grant stock options with an exercise price
equal to the quoted closing market price of the Company's common shares on the
grant date. Had compensation cost for the Plans been determined based on the
fair value at the grant dates for awards under the Plans consistent with SFAS
No. 123, the Company's net (loss) income and (loss) earnings per share would
have been reduced to the following pro forma amounts:
10
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------- ---------- ----------- ----------- -----------
Net (loss) income available to common shareholders,
as reported $ (3,305) $ 21,174 $ (28,688) $ 38,487
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards (700) (1,011) (2,301) (3,087)
--------- ---------- ---------- ----------
Pro forma net (loss) income $ (4,005) $ 20,163 $ (30,989) $ 35,400
(Loss) earnings per share:
Basic - as reported $ (0.03) $ 0.20 $ (0.29) $ 0.37
Basic - pro forma $ (0.04) $ 0.19 $ (0.31) $ 0.34
Diluted - as reported $ (0.03) $ 0.20 $ (0.29) $ 0.37
Diluted - pro forma $ (0.04) $ 0.19 $ (0.31) $ 0.34
SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company adopted SFAS
149 effective July 1, 2003. The adoption of this Statement did not have a
material impact on the Company's financial condition or its results of
operations.
SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. Most provisions of this Statement were to be applied to
financial instruments entered into or modified after May 31, 2003 and to
existing instruments as of the beginning of the first interim financial
reporting period after June 15, 2003. On October 29, 2003, the FASB agreed to
defer indefinitely the application of the provisions of SFAS No. 150 to
noncontrolling interests in limited life subsidiaries.
FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued, and liability-recognition requirements for a guarantor of certain
types of debt. The new guidance requires a guarantor to recognize a liability at
the inception of a guarantee which is covered by the new requirements whether or
not payment is probable, creating the new concept of a "stand-ready" obligation.
Initial recognition and initial measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. See
Note 11, "Commitments and Contingencies," for disclosure of the Company's
guarantees at September 30, 2003. The Company adopted FIN 45 effective January
1, 2003.
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to previously
existing VIEs for financial periods ending after December 15, 2003. VIEs are
generally a legal structure used for business enterprises that either do not
have equity investors with voting rights, or have equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The objective of the new guidance is to improve reporting by addressing when a
company should include in its financial statements the assets, liabilities and
activities of other entities such as VIEs. FIN 46 requires VIEs to be
consolidated by a company if the company is subject to a majority of the risk of
loss from the VIE's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about VIEs that the
company is not required to consolidate but in which it has a significant
variable interest. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the VIEs were
established. These disclosure requirements are as follows: (a) the nature,
purpose, size, and activities of the VIE; and, (b) the enterprise's maximum
exposure to loss as a result of its involvement with the VIEs. FIN 46 may be
11
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
applied prospectively with a cumulative effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative effect adjustment as of the beginning of
the first year restated. The Company is assessing the impact of this
Interpretation, if any, on its existing entities and does not believe the impact
will be significant on its liquidity, financial position, and results of
operations. The Company did not create any VIEs subsequent to January 31, 2003.
SIGNIFICANT ACCOUNTING POLICIES
ACQUISITION OF OPERATING PROPERTIES. The Company allocates the purchase
price of acquired properties to tangible and identified intangible assets
acquired based on their fair values in accordance with SFAS No. 141, "Business
Combinations."
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property as if it were vacant and available
to lease at the purchase date and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The contributory value of tenant improvements is
separately estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Company performs this analysis on a lease by lease
basis. The capitalized above-market lease values are amortized as a reduction to
rental income over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values are amortized as an increase to rental
income over the initial term plus the term of the below-market fixed rate
renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Company's overall relationship with that respective customer.
Characteristics considered by management in allocating these values include the
nature and extent of the Company's existing business relationships with the
customer, growth prospects for developing new business with the customer, the
customer's credit quality and the expectation of lease renewals, among other
factors. The in-place lease value and customer relationship value are both
amortized to expense over the initial term and any renewal periods in the
respective leases, but in no event does the amortization period for the
intangible assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and the customer relationship value would be charged to expense.
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," ("EPS")
specifies the computation, presentation and disclosure requirements for earnings
per share.
12
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock, where such exercise or conversion would result in a lower EPS
amount. The Company presents both basic and diluted earnings per share.
The following tables present reconciliations for the three and nine
months ended September 30, 2003 and 2002 of basic and diluted earnings per share
from "Income before discontinued operations and cumulative effect of a change in
accounting principle" to "Net (loss) income available to common shareholders."
The table also includes weighted average shares on a basic and diluted basis.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2003 2002
---------------------------- ---------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- ---------------------------- ---------------------------
BASIC EPS -
Income before discontinued operations $ 7,171 99,172 $24,790 103,766
Series A Preferred Share distributions (4,556) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
---------------------------- ---------------------------
Net income available to common
shareholders before discontinued
operations $ 596 99,172 $ 0.01 $18,215 103,766 $ 0.18
Net (loss) income from discontinued
operations, net of minority interests (1,884) (0.02) 1,511 0.01
(Loss) gain on real estate from
discontinued operations, net of
minority interests (2,017) (0.02) 1,448 0.01
---------------------------- ---------------------------
Net (loss) income available to common
shareholders $(3,305) 99,172 $(0.03) $21,174 103,766 $ 0.20
============================ ===========================
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------
2003 2002
---------------------------- ---------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- ---------------------------- ---------------------------
DILUTED EPS -
Income before discontinued operations $ 7,171 99,172 $24,790 103,766
Series A Preferred Share distributions (4,556) (4,556)
Series B Preferred Share distributions (2,019) (2,019)
---------------------------- ---------------------------
Effect of dilutive securities:
Additional common shares relating to
share and unit options 10 121
Net income available to common
shareholders before discontinued
operations $ 596 99,182 $ 0.01 $18,215 103,887 $ 0.18
Net (loss) income from discontinued
operations, net of minority interests (1,884) (0.02) 1,511 0.01
(Loss) gain on real estate from
discontinued operations, net of
minority interests (2,017) (0.02) 1,448 0.01
---------------------------- ---------------------------
Net (loss) income available to common
shareholders $(3,305) 99,182 $(0.03) $21,174 103,887 $ 0.20
============================ ===========================
13
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
----------------------------- ---------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- ----------------------------- ---------------------------
BASIC EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 6,569 99,186 $ 53,245 104,527
Series A Preferred Share distributions (13,668) (12,146)
Series B Preferred Share distributions (6,057) (3,028)
----------------------------- ---------------------------
Net (loss) income available to common
shareholders before discontinued
operations and cumulative effect of
a change in accounting principle $(13,156) 99,186 $(0.13) $ 38,071 104,527 $ 0.37
Net income from discontinued
operations, net of minority interests 1,080 0.01 4,542 0.04
(Loss) gain on real estate from
discontinued operations, net of
minority interests (16,612) (0.17) 5,046 0.05
Cumulative effect of a change in
accounting principle - - (9,172) (0.09)
----------------------------- ---------------------------
Net (loss) income available to common
shareholders $(28,688) 99,186 $(0.29) $ 38,487 104,527 $ 0.37
============================= ===========================
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
----------------------------- ---------------------------
Wtd. Per Wtd. Per
Income Avg. Share Income Avg. Share
(in thousands, except per share amounts) (Loss) Shares Amount (Loss) Shares Amount
- ---------------------------------------- ----------------------------- ---------------------------
DILUTED EPS -
Income before discontinued operations
and cumulative effect of a change in
accounting principle $ 6,569 99,186 $ 53,245 104,527
Series A Preferred Share distributions (13,668) (12,146)
Series B Preferred Share distributions (6,057) (3,028)
----------------------------- ---------------------------
Effect of dilutive securities:
Additional common shares relating to
share and unit options - 515
Net (loss) income available to common
shareholders before discontinued
operations and cumulative effect of
a change in accounting principle $(13,156) 99,186 $(0.13) $ 38,071 105,042 $ 0.37
Net income from discontinued
operations, net of minority interests 1,080 0.01 4,542 0.04
(Loss) gain on real estate from
discontinued operations, net of
minority interests (16,612) (0.17) 5,046 0.05
Cumulative effect of a change in
accounting principle - - (9,172) (0.09)
----------------------------- ---------------------------
Net (loss) income available to common
shareholders $(28,688) 99,186 $(0.29) $ 38,487 105,042 $ 0.37
============================= ===========================
14
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents supplemental cash flows disclosures for the nine
months ended September 30, 2003 and 2002.
SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2003 2002
(in thousands)
- -------------------------------------------------- --------- -----------
Interest paid on debt $ 110,670 $ 106,969
Interest capitalized - Office Properties - 118
Interest capitalized - Residential Development Properties 13,896 9,591
Additional interest paid in conjunction with cash flow hedges 15,472 18,028
--------- -----------
Total interest paid $ 140,038 $ 134,706
========= ===========
Cash paid for income taxes $ 1,954 $ 10,200
========= ===========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of Operating Partnership units to common shares with resulting
reduction in minority interest and increases in common shares and
additional paid-in capital $ 8 $ 120
Unrealized gain (loss) on marketable securities 3,761 (1,814)
Impairment charges related to real estate assets 20,374 5,902
Assumption of debt in conjunction with acquisition of an Office
Property 38,000 -
Unrealized net gain on cash flow hedges 5,999 3,083
Non-cash compensation 147 1,990
Financed sale of land parcel 11,800 7,520
SUPPLEMENTAL SCHEDULE OF 2003 CONSOLIDATION OF DBL, MVDC AND HADC AND THE
2002 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES PURSUANT TO THE
FEBRUARY 14, 2002 AGREEMENT WITH COPI:
Net investment in real estate $ (9,692) $ (570,175)
Restricted cash and cash equivalents - (3,968)
Accounts receivable, net (3,057) (23,338)
Investments in unconsolidated companies 13,552 309,103
Notes receivable, net (25) 29,816
Income tax asset - current and deferred, net (3,564) (21,784)
Other assets, net (820) (63,263)
Notes payable 312 129,157
Accounts payable, accrued expenses and other liabilities 12,696 201,159
Minority interest - consolidated real estate partnerships 1,972 51,519
--------- -----------
Increase in cash $ 11,374 $ 38,226
========= ===========
3. SEGMENT REPORTING
For purposes of segment reporting as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company currently has four major investment segments based on property type: the
Office Segment; the Resort/Hotel Segment; the Residential Development Segment;
and the Temperature-Controlled Logistics Segment. Management utilizes this
segment structure for making operating decisions and assessing performance.
The Company uses funds from operations ("FFO") as the measure of
segment profit or loss. FFO, as used in this document, is based on the
definition adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts ("NAREIT") and means:
- Net Income (Loss) - determined in conformity with
GAAP;
- excluding gains (losses) from sales of depreciable
operating property;
- excluding extraordinary items (as defined by GAAP);
- including depreciation and amortization of real
estate assets; and
- after adjusting for unconsolidated partnerships and
joint ventures.
The Company calculates FFO available to common shareholders in the same
manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available
to Common Shareholders.
15
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO
available to common shareholders an appropriate measure of performance for an
equity REIT and FFO an appropriate measure of performance for its investment
segments. However, FFO available to common shareholders and FFO should not be
considered as alternatives to net income determined in accordance with GAAP as
an indication of the Company's operating performance.
The Company's measures of FFO available to common shareholders and FFO
may not be comparable to similarly titled measures of other REITs if those REITs
apply the definition of FFO in a different manner than the Company.
Selected financial information related to each segment for the three
and nine months ended September 30, 2003 and 2002, and total assets,
consolidated property level financing, consolidated other liabilities, and
minority interests for each of the segments at September 30, 2003 and December
31, 2002, are presented below:
SELECTED FINANCIAL FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
INFORMATION -----------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- ------------------------- -------- ------------ ----------- ------------ ----------- -----------
Property revenue $127,044 (1) $ 54,769 $ 29,808 $ - $ - $ 211,621
Property expense (59,499) (44,926) (29,723) - - (134,148)
-------- ---------- ---------- ---------- --------- ---------
Income from property
operations $ 67,545 $ 9,843 $ 85 $ - $ - $ 77,473
======== ========== ========== ========== ========= =========
Other income $ - $ - $ - $ - $ 12,653 $ 12,653
Other expense - - - - (91,611) (91,611)
-------- ---------- ---------- ---------- --------- ---------
Total other income
(expense) $ - $ - $ - $ - $ (78,958)(2) $ (78,958)
======== ========== ========== ========== ========= =========
Equity in net income (loss)
of unconsolidated
companies $ 5,475 $ (89) $ 1,725 $ (949) $ (864) $ 5,298
======== ========== ========== ========== ========= =========
Funds from operations
before impairment
charges related to real
estate assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (48,834) $ 43,463 (5)
-------- ---------- ---------- ---------- --------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (2,356) $ (2,356)
-------- ---------- ---------- ---------- --------- ---------
Funds from operations
after impairment charges
related to real estate
assets $ 73,855 $ 11,471 $ 2,773 $ 4,198 $ (51,190) $ 41,107 (5)
======== ========== ========== ========== ========= =========
SELECTED FINANCIAL FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
INFORMATION -----------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- ------------------------- -------- ------------ ----------- ------------ ----------- -----------
Property revenue $140,840 (1) $ 56,110 $ 41,832 $ - $ - $ 238,782
Property expense (59,853) (44,599) (39,306) - - (143,758)
-------- ---------- ---------- ---------- --------- ---------
Income from property
operations $ 80,987 $ 11,511 $ 2,526 $ - $ - $ 95,024
======== ========== ========== ========== ========= =========
Other income $ - $ - $ - $ - $ 24,937 $ 24,937
Other expense - - - - (94,669) (94,669)
-------- ---------- ---------- ---------- --------- ---------
Total other income
(expense) $ - $ - $ - $ - $ (69,732)(2) $ (69,732)
======== ========== ========== ========== ========= =========
Equity in net income (loss)
of unconsolidated
companies $ 874 $ (91) $ 4,272 $ (3,101) $ (755) $ 1,199
======== ========== ========== ========== ========= =========
Funds from operations
before and after
impairment charges
related to real estate
assets $ 88,045 $ 13,593 $ 4,319 $ 3,675 $ (59,620) $ 50,012 (5)
======== ========== ========== ========== ========= =========
16
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELECTED FINANCIAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
INFORMATION ------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- ------------------------- --------- ------------ ----------- ------------ ----------- ----------
Property revenue $ 375,996 (1) $ 170,122 $ 119,380 $ - $ - $ 665,498
Property expense (179,779) (137,325) (110,483) - - (427,587)
--------- ------------ ----------- ------------ ----------- ---------
Income from property
operations $ 196,217 $ 32,797 $ 8,897 $ - $ - $ 237,911
========= ============ =========== ============ =========== =========
Other income $ - $ - $ - $ - $ 17,233 $ 17,233
Other expense - - - - (270,764) (270,764)
--------- ------------ ----------- ------------ ----------- ---------
Total other income
(expense) $ - $ - $ - $ - $ (253,531)(2) $(253,531)
========= ============ =========== ============ =========== =========
Equity in net income (loss)
of unconsolidated
companies $ 8,797 $ 2,036 $ 4,235 $ 152 $ (1,679) $ 13,541
========= ============ =========== ============ =========== =========
Funds from operations
before impairment
charges related to real
estate assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (164,323) $ 121,321 (5)
--------- ------------ ----------- ------------ ----------- ---------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (20,374) $ (20,374)
--------- ------------ ----------- ------------ ----------- ---------
Funds from operations
after impairment charges
related to real estate
assets $ 216,126 $ 39,458 $ 13,766 $ 16,294 $ (184,697) $ 100,947 (5)
========= ============ =========== ============ =========== =========
SELECTED FINANCIAL FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
INFORMATION ---------------------------------------------------------------------------------------------
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in thousands) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- ------------------------- --------- ------------ ----------- ------------ ----------- ----------
Property revenue $ 411,067 (1) $ 148,157 $ 168,372 $ - $ - $ 727,596
Property expense (181,303) (110,701) (152,983) - - (444,987)
--------- ------------ ----------- ------------ ----------- ----------
Income from property
operations $ 229,764 $ 37,456 $ 15,389 $ - $ - $ 282,609
========= ============ =========== ============ =========== ==========
Other income $ - $ - $ - $ - $ 29,071 $ 29,071
Other expense - - - - (266,160) (266,160)
--------- ------------ ----------- ------------ ----------- ----------
Total other income
(expense) $ - $ - $ - $ - $ (237,089)(2) $ (237,089)
========= ============ =========== ============ =========== ==========
Equity in net income (loss)
of unconsolidated
companies $ 3,655 $ (91) $ 22,934 $ (3,828) $ (5,281) $ 17,389
========= ============ =========== ============ =========== ==========
Funds from operations before
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (175,719) $ 167,344 (5)
--------- ------------ ----------- ------------ ----------- ----------
Impairment charges related
to real estate assets $ - $ - $ - $ - $ (2,048) $ (2,048)
--------- ------------ ----------- ------------ ----------- ----------
Funds from operations after
impairment charges related
to real estate assets $ 249,119 $ 47,140 $ 32,354 $ 14,450 $ (177,767) $ 165,296 (5)
========= ============ =========== ============ =========== ==========
__________________________
See footnotes to the following table.
17
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TEMPERATURE-
RESIDENTIAL CONTROLLED CORPORATE
OFFICE RESORT/HOTEL DEVELOPMENT LOGISTICS AND
(in millions) SEGMENT SEGMENT SEGMENT SEGMENT OTHER TOTAL
- ------------------------------------- -------- ------------- ------------ ------------ --------- -------
TOTAL ASSETS BY SEGMENT: (3)
Balance at September 30, 2003 $ 2,583 $ 492 $ 801 $ 302 $ 120 $ 4,298
Balance at December 31, 2002 2,624 492 729 305 138 4,288
CONSOLIDATED PROPERTY LEVEL FINANCING:
Balance at September 30, 2003 $ (1,402) $ (132) $ (95) $ - $ (947)(4) $(2,576)
Balance at December 31, 2002 (1,371) (130) (93) - (789)(4) (2,383)
CONSOLIDATED OTHER LIABILITIES:
Balance at September 30, 2003 $ (107) $ (40) $ (138) $ - $ (66) $ (351)
Balance at December 31, 2002 (135) (44) (125) - (72) (376)
MINORITY INTERESTS:
Balance at September 30, 2003 $ (8) $ (7) $ (23) $ - $ (109) $ (147)
Balance at December 31, 2002 (11) (8) (25) - (131) (175)
- ------------------------
(1) Includes lease termination fees (net of the write-off of deferred rent
receivables) of approximately $5.3 million and $3.0 million for the
three months ended September 30, 2003 and 2002, respectively and $8.3
million and $4.8 million for the nine months ended September 30, 2003
and 2002, respectively.
(2) For purposes of this Note, Corporate and Other includes income from
investment land sales, net, gain on joint venture of properties, net,
interest and other income, corporate general and administrative,
interest expense, depreciation and amortization, amortization of
deferred financing costs, preferred return paid to GMAC Commercial
Mortgage Corporation ("GMACCM") for 2002, preferred distributions,
impairment charges and other expenses.
(3) Total assets by segment is inclusive of investments in unconsolidated
companies, net of unconsolidated debt.
(4) Inclusive of Corporate bonds and credit facility.
(5) Total funds from operations represents funds from operations available
to common shareholders. The following table presents a reconciliation
of Consolidated Funds from Operations Available to Common Shareholders
to Net Income (Loss).
RECONCILIATION OF CONSOLIDATED FUNDS FROM OPERATIONS AVAILABLE TO COMMON
SHAREHOLDERS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
(in thousands) 2003 2002 2003 2002
- ---------------------------------------- ------------ --------- ----------- ----------
Consolidated Funds From Operations
Available to Common Shareholders After
Impairment Charges Related to Real
Estate Assets $ 41,107 $ 50,012 $ 100,947 $ 165,296
Impairment charges related to real
estate assets 2,356 - 20,374 2,048
------------ --------- ----------- ----------
Consolidated Funds from Operations
Available to Common Shareholders Before
Impairment Charges Related to Real
Estate Assets 43,463 50,012 121,321 167,344
------------ --------- ----------- ----------
Adjustments to reconcile Consolidated
Funds from Operations Available to Common
Shareholders Before Impairment Charges
Related to Real Estate Assets to Net
Income (Loss):
Depreciation and amortization of
real estate assets (39,617) (36,419) (109,017) (102,088)
(Loss) gain on property sales, net (14) 19,646 (719) 25,311
Impairment charges related to real
estate assets (2,356) - (20,374) (2,048)
Cumulative effect of a change in
accounting principle - - - (9,172)
Adjustment for investments in
unconsolidated companies:
Office Properties 1,613 (1,946) (3,805) (5,997)
Resort/Hotel Properties (394) (370) (1,143) (370)
Residential Development
Properties (8) 615 (235) (2,339)
Temperature-Controlled
Logistics Properties (5,147) (6,777) (16,143) (18,278)
Other (260) (96) (178) (5,872)
Unitholder minority interest (585) (3,491) 1,605 (8,004)
Series A Preferred share
distributions 4,556 4,556 13,668 12,146
Series B Preferred share
distributions 2,019 2,019 6,057 3,028
------------ --------- ----------- ----------
Net Income (Loss) $ 3,270 $ 27,749 $ (8,963) $ 53,661
============ ========= =========== ==========
- --------------
18
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ASSET ACQUISITIONS
OFFICE PROPERTIES
On August 26, 2003, the Company acquired The Colonnade, an 11-story,
216,000 square foot Class A office tower, located in the Coral Gables submarket
of Miami, Florida. The Company acquired the Office Property for approximately
$51.4 million, funded by the Company's assumption of a $38 million loan from
Bank of America and a draw on the Company's credit facility. The Office Property
is wholly-owned and included in the Company's Office Segment.
JOINT VENTURES
On October 8, 2003, the Company entered into a joint venture, Crescent
One Briar Lake L.P., with affiliates of J.P. Morgan Fleming Asset Management,
Inc. The joint venture purchased One Briar Lake Plaza, located in the Westchase
submarket of Houston, Texas, for approximately $74.4 million. The Property is a
20 story, 502,000 square foot Class A office building. The affiliates of J.P.
Morgan Fleming Asset Management, Inc. own a 70% interest, and the Company owns a
30% interest, in the joint venture. The initial cash equity contribution to the
joint venture was $24.4 million, of which the Company's portion was $7.3
million. The Company's equity contribution and an additional working capital
contribution of $0.5 million were funded primarily through a draw under the
Company's credit facility. The remainder of the purchase price of the Property
was funded by a secured loan to the joint venture in the amount of $50.0
million. None of the mortgage financing at the joint venture level is guaranteed
by the Company. The Company manages and leases the Office Property on a fee
basis. The Office Property is an unconsolidated investment and will be included
in the Company's Office Segment.
RESIDENTIAL DEVELOPMENT PROPERTIES
On August 14, 2003, CRDI, a consolidated subsidiary of the Company,
completed the purchase of a tract of undeveloped land in Eagle County, Colorado
for approximately $15.5 million, funded by a draw on the Company's credit
facility.
5. DISCONTINUED OPERATIONS
In August 2001, the FASB issued SFAS No. 144, which requires that the
results of operations of assets sold or held for sale, and any gains or losses
recognized on assets sold and held for sale, be disclosed separately in the
Company's Consolidated Statements of Operations. The Company adopted SFAS No.
144 on January 1, 2002. In accordance with SFAS No. 144, the results of
operations of the assets sold or held for sale have been presented as "Net
(loss) income from discontinued operations, net of minority interests," and gain
or loss and impairments in the assets sold or held for sale have been presented
as "(Loss) gain on real estate from discontinued operations, net of minority
interests" in the accompanying Consolidated Statements of Operations for the
three and nine months ended September 30, 2003 and 2002. The impairment charges
represent the difference between the carrying value of assets sold or held for
sale and the actual or estimated sales price, less costs of sale. The carrying
value of the assets held for sale has been reflected as "Properties held for
disposition, net" in the accompanying Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002.
ASSETS HELD FOR SALE
OFFICE SEGMENT
As of September 30, 2003, the 1800 West Loop South Office Property
located in the West Loop/Galleria submarket in Houston, Texas was held for sale.
During the first quarter of 2003, the Company recognized an approximately $12.7
million impairment charge, net of minority interests, on the 1800 West Loop
South Office Property.
In addition, as of September 30, 2003, the Las Colinas Plaza retail
property, located in the Las Colinas submarket in Dallas, Texas, the Liberty
Plaza Office Property located in the Far North Dallas submarket in Dallas,
Texas, the 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas and the four Woodlands Office Properties located in
The Woodlands submarket in Houston, Texas were held for sale.
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Company sold a behavioral healthcare property
for $2.0 million, consisting of $1.3 million in cash and a $0.7 million note
receivable. The Company recognized a loss on the sale of this property of
19
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $0.3 million. A $2.3 million impairment charge, net of minority
interest, had been recognized during 2002 related to this property.
On May 2, 2003, the Company sold a behavioral healthcare property for
$2.1 million. The Company recognized a loss on the sale of this property of
approximately $0.1 million. A $0.7 million impairment charge, net of minority
interest, was recognized during the first quarter of 2003 related to this
property.
On July 10, 2003, the Company sold a behavioral healthcare property for
$2.3 million and recognized a minimal gain on the sale. A $0.8 million
impairment charge, net of minority interest, was recognized during the second
quarter of 2003 related to this property.
As of September 30, 2003, the Company owned four behavioral healthcare
properties. Impairment charges of approximately $2.0 million, net of minority
interests, were recognized during the third quarter related to three of these
four remaining properties. Two of these properties were sold on October 15,
2003.
SUMMARY OF ASSETS HELD FOR SALE
The following table indicates the major classes of assets of the
Properties held for sale.
(in thousands) SEPTEMBER 30, 2003(1) DECEMBER 31, 2002
- -------------------------------- --------------------- ---------------------
Land $ 18,507 $ 24,151
Buildings and improvements 101,007 119,881
Furniture, fixture and equipment 548 1,713
Accumulated depreciation (32,361) (29,409)
--------------------- ---------------------
Net investment in real estate $ 87,701 $ 116,336
===================== =====================
- --------------------------
(1) Includes seven office properties, one retail property and four
behavioral healthcare properties.
The following tables present rental revenues, operating and other
expenses, depreciation and amortization, minority interests, net income, and
impairments for the nine months ended September 30, 2003 and 2002, for
properties included in discontinued operations as of September 30, 2003.
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------
Total revenues 14,486 31,082
Operating and other expenses (6,811) (19,575)
Depreciation and amortization (6,402) (6,391)
Unitholder minority interests (193) (574)
- ----------------------------------------------------------------------------------------------------
Net income from discontinued operations, net of minority interests 1,080 4,542
====================================================================================================
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------
Loss on impairment of real estate (19,174) (1,449)
Realized (loss) gain on sale of properties (411) 7,131
Unitholder minority interests 2,973 (636)
- ----------------------------------------------------------------------------------------------------
(Loss) gain on real estate from discontinued operations, net of
minority interests (16,612) 5,046
====================================================================================================
20
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER ASSET DISPOSITIONS
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Company completed the sale of approximately
one-half acre of undeveloped land located in Dallas, Texas. The sale generated
net proceeds and a net gain of approximately $0.3 million. This land was
wholly-owned by the Company.
On May 15, 2003, the Company completed the sale of approximately 24.8
acres of undeveloped land located in Coppell, Texas. The sale generated net
proceeds of $3.0 million and a net gain of approximately $1.1 million. This land
was wholly-owned by the Company.
On June 27, 2003, the Company sold approximately 3.5 acres of
undeveloped land located in Houston, Texas. The sale generated proceeds of $2.1
million, net of closing costs, and a note receivable in the amount of $11.8
million, with annual installments of principal and interest payments beginning
June 27, 2004, through maturity on June 27, 2010. The principal payment amounts
are calculated based upon a 20-year amortization and the interest rate is 4% for
the first two years and thereafter the prime rate, as defined in the note,
through maturity. Due to a modification of the sales agreement after June 30,
2003, the Company recognized a net gain on the sale of this land of
approximately $8.9 million in the third quarter of 2003. This land was
wholly-owned by the Company.
On September 30, 2003, the Company completed the sale of approximately
3.1 acres of undeveloped land located in the Greenway Plaza office complex of
Houston, Texas. The sale generated net proceeds of approximately $5.3 million
and a net gain of approximately $2.4 million. This land was wholly-owned by the
Company.
7. TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
TEMPERATURE-CONTROLLED LOGISTICS PROPERTIES
As of September 30, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
Crescent Operating, Inc. ("COPI"). The Company has no economic interest in
AmeriCold Logistics. See Note 16, "COPI," for information on the proposed
acquisition of COPI's 40% interest in AmeriCold Logistics by a new entity to be
owned by the Company's shareholders.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000) and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 7, 2003, the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.
AmeriCold Logistics deferred $32.5 million of the total $115.1 million
of rent payable for the nine months ended September 30, 2003. The Company's
share of the deferred rent was $13.0 million. The Company recognizes rental
income from the Temperature-Controlled Logistics Properties when earned and
collected and has not recognized the $13.0 million of deferred rent in equity in
net income of the Temperature-Controlled Logistics Properties for the nine
months ended September 30, 2003. As of September 30, 2003, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $73.1 million and $66.8 million,
respectively, of which the Company's portions were $29.2 million and $26.7
million, respectively.
The Company and Vornado Realty Trust, L.P. have engaged underwriters to
explore additional debt financing alternatives for the Temperature-Controlled
Logistics Corporation. It is anticipated that this financing will be a
non-recourse,
21
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
secured term loan in an amount in excess of $200 million. If this financing is
obtained, the expected use of proceeds will allow the Company to make a
reduction in its investment in this business and will provide the business with
additional financing for expansion.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of September 30, 2003, the Company held a 56% interest in Vornado
Crescent Carthage and KC Quarry, L.L.C. ("VCQ"). The assets of VCQ include two
quarries and the related land. The Company accounts for this investment as an
unconsolidated equity investment.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.
On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. The
receivables were collected during the second quarter of 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Company.
8. INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. These investments are accounted for
using the equity method of accounting.
The Company, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments. These
investments are accounted for using the equity method of accounting.
22
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of September 30, 2003.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2003
- --------------------------------------------------------- -------------------------------------- ------------------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, L.L.C. Office (Miami Center - Miami) 40.0% (2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (4)
Houston PT Four Westlake Park Office Limited Partnership Office (Four Westlake Park-Houston) 20.0% (4)
Houston PT Three Westlake Park Office Limited Partnership Office (Three Westlake Park - Houston) 20.0% (4)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (5)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (6)(7)
The Woodlands Land Development Company, L.P. Residential Development 42.5% (6)(7)
Blue River Land Company, L.L.C. Residential Development 50.0% (8)
EW Deer Valley, L.L.C. Residential Development 41.7% (9)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0% (10)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (11)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (12)
CR License, L.L.C. Other 30.0% (13)
The Woodlands Operating Company, L.P. Other 42.5% (6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (14)
SunTx Fulcrum Fund, L.P. Other 28.1% (15)
G2 Opportunity Fund, L.P. Other 12.5% (16)
- ----------------------------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by
Trizec Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by
an affiliate of a fund managed by JP Morgan Fleming Asset Management,
Inc.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned
by a pension fund advised by JP Morgan Fleming Asset Management, Inc.
(4) The remaining 80% interest in each of Austin PT BK One Tower Office
Limited Partnership, Houston PT Three Westlake Park Office Limited
Partnership and Houston PT Four Westlake Park Office Limited
Partnership is owned by an affiliate of General Electric Pension Trust.
(5) The remaining 70% interest in Crescent Five Post Oak Park L.P. is owned
by an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the Woodlands Land Development
Company, L.P. ("WLDC"), The Woodlands Commercial Properties Company,
L.P. ("Woodlands CPC") and The Woodlands Operating Company, L.P. is
owned by an affiliate of Morgan Stanley.
(7) Distributions are made to partners based on specified payout
percentages. During the nine months ended September 30, 2003, the
payout percentage to the Company was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned
by parties unrelated to the Company.
(9) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by
parties unrelated to the Company.
(10) The remaining 50% interest in Manalapan Hotel Partners, L.L.C.
("Manalapan") is owned by WB Palm Beach Investors, L.L.C. In October
2003, Manalapan entered into a contract to sell the Ritz Carlton Palm
Beach Resort/Hotel Property. The sale is anticipated to close November
2003. The Company's equity interest in Manalapan is 50%.
(11) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(12) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(13) The remaining 70% interest in CR License, L.L.C. is owned by an
affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(14) The remaining 35% interest in Canyon Ranch Las Vegas, L.L.C. is owned
by an affiliate of the management company of two of the Company's
Resort/Hotel Properties.
(15) The SunTx Fulcrum Fund, L.P.'s ("SunTx") objective is to invest in a
portfolio of acquisitions that offer the potential for substantial
capital appreciation. The remaining 71.9% of SunTx is owned by a group
of individuals unrelated to the Company. The Company's ownership
percentage will decline by the closing date of SunTx as capital
commitments from third parties are secured. The Company's projected
ownership interest at the closing of SunTx is approximately 7.5% based
on SunTx's manager's expectations for the final SunTx capitalization.
The Company accounts for its investment in SunTx under the cost method.
The Company's investment at September 30, 2003 was $6.9 million.
(16) G2 Opportunity Fund, L.P. ("G2") was formed for the purpose of
investing in commercial mortgage backed securities and other commercial
real estate investments. Goff-Moore Strategic Partners, L.P. ("GMSP")
and GMACCM each own 21.875% of G2, with the remaining 43.75% owned by
parties unrelated to the Company. See Note 15, "Related Party
Transactions," for information regarding the ownership interests of
trust managers and officers of the Company in GMSP.
23
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY FINANCIAL INFORMATION
The Company reports its share of income and losses based on its
ownership interest in its respective equity investments, adjusted for any
preference payments. As a result of the Company's transaction with COPI on
February 14, 2002, certain entities that were reported as unconsolidated
entities in 2002 prior to February 14, 2002 are consolidated in the September
30, 2003 financial statements. Additionally, certain unconsolidated subsidiaries
of the newly consolidated entities are now shown separately as unconsolidated
entities of the Company. As a result of the Company's January 2, 2003 purchase
of the remaining 2.56% economic interest, representing 100% of the voting stock,
in DBL Holdings, Inc. ("DBL"), DBL is consolidated in the September 30, 2003
financial statements. Because DBL owns a majority of the voting stock of MVDC
and HADC, these two Residential Development Corporations are consolidated in the
September 30, 2003 financial statements.
The unconsolidated entities that are included under the headings on the
following tables are summarized below.
Balance Sheets as of September 30, 2003:
- WLDC;
- Other Residential Development - This includes the Blue River
Land Company, L.L.C. and EW Deer Valley, L.L.C.;
- Resort/Hotel - This includes Manalapan;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- Office - This includes Main Street Partners, L.P., Houston PT
Three Westlake Park Office Limited Partnership, Houston PT
Four Westlake Park Office Limited Partnership, Austin PT BK
One Tower Office Limited Partnership, Crescent 5 Houston
Center, L.P., Crescent Miami Center, L.L.C., Crescent Five
Post Oak Park L.P. and Woodlands CPC; and
- Other - This includes CR License, L.L.C., The Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas, L.L.C., SunTx
and G2.
Balance Sheets as of December 31, 2002:
- WLDC;
- Other Residential Development - This includes the Blue River
Land Company, L.L.C., MVDC and HADC;
- Resort/Hotel - This includes Manalapan;
- Temperature-Controlled Logistics - This includes the
Temperature-Controlled Logistics Partnership and VCQ;
- Office - This includes Main Street Partners, L.P., Houston PT
Three Westlake Park Office Limited Partnership, Houston PT
Four Westlake Park Office Limited Partnership, Austin PT BK
One Tower Office Limited Partnership, Crescent 5 Houston
Center, L.P., Crescent Miami Center, L.L.C., Crescent Five
Post Oak Park L.P. and Woodlands CPC; and
- Other - This includes DBL, CR License, L.L.C., The Woodlands
Operating Company, L.P., Canyon Ranch Las Vegas, L.L.C. and
SunTx.
Summary Statements of Operations for the nine months ended
September 30, 2003:
- WLDC;
- Other Residential Development - This includes the operating
results for Blue River Land Company, L.L.C. and EW Deer
Valley, L.L.C.;
- Resort/Hotel - This includes the operating results for
Manalapan;
- Temperature-Controlled Logistics - This includes the operating
results for the Temperature-Controlled Logistics Partnership
and VCQ;
- Office - This includes the operating results for Main Street
Partners, L.P., Houston PT Three Westlake Park Office Limited
Partnership, Houston PT Four Westlake Park Office Limited
Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Crescent Miami
Center L.L.C., Crescent Five Post Oak Park L.P. and Woodlands
CPC; and
- Other - This includes the operating results for CR License,
L.L.C., The Woodlands Operating Company, L.P. and Canyon Ranch
Las Vegas, L.L.C. and G2.
24
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary Statements of Operations for the nine months ended September
30, 2002:
- WLDC - This includes WLDC's operating results for the period
February 15 through September 30, 2002 and TWLC's operating
results for the period January 1 through February 14, 2002;
- Other Residential Development - This includes the operating
results for DMDC and CRDI for the period January 1 through
February 14, 2002, the operating results of Blue River Land
Company, L.L.C. and Manalapan for the period February 15
through September 30, 2002, and the operating results of MVDC
and HADC;
- Temperature-Controlled Logistics - This includes the operating
results for the Temperature-Controlled Logistics Partnership
and VCQ;
- Office - This includes the operating results for Main Street
Partners, L.P., Houston PT Three Westlake Park Office Limited
Partnership for the period August 21 through September 30,
2002, Houston PT Four Westlake Park Office Limited
Partnership, Austin PT BK One Tower Office Limited
Partnership, Crescent 5 Houston Center, L.P., Woodlands CPC
and Crescent Miami Center, L.L.C. for the period September 25
through September 30, 2002; and
- Other - This includes the operating results for DBL, CR
License, L.L.C., The Woodlands Operating Company and Canyon
Ranch Las Vegas, L.L.C.
AS OF SEPTEMBER 30, 2003
-------------------------------------------------------------------------
BALANCE SHEETS: THE WOODLANDS OTHER RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS
- ----------------------------------- ---------------- ---------------- ---------------- ----------------
Real estate, net $ 391,960 $ 58,177 $ 80,079 $ 1,195,932
Cash 12,685 1,837 4,636 41,532
Other assets 51,395 1,147 3,978 99,047
---------------- ---------------- ---------------- ----------------
Total assets $ 456,040 $ 61,161 $ 88,693 $ 1,336,511
================ ================ ================ ================
Notes payable $ 288,280 $ 7,650 $ 52,300 $ 563,263
Notes payable to the Company 11,538 - - -
Other liabilities 61,538 4,966 5,376 10,778
Equity 94,684 48,545 31,017 762,470
---------------- ---------------- ---------------- ----------------
Total liabilities and equity $ 456,040 $ 61,161 $ 88,693 $ 1,336,511
================ ================ ================ ================
Company's share of unconsolidated
debt $ 122,519 $ 3,825 $ 26,150 $ 225,305
================ ================ ================ ================
Company's investments in
unconsolidated companies $ 38,309 $ 30,609 $ 15,508 $ 302,392
================ ================ ================ ================
BALANCE SHEETS: AS OF SEPTEMBER 30, 2003
------------------------------------------------------
(in thousands) OFFICE OTHER TOTAL
- ----------------------------------- ---------------- ---------------- ----------------
Real estate, net $ 808,111
Cash 36,470
Other assets 54,850
----------------
Total assets $ 899,431
================
Notes payable $ 523,778
Notes payable to the Company -
Other liabilities 37,848
Equity 337,805
----------------
Total liabilities and equity $ 899,431
================
Company's share of unconsolidated
debt $ 182,317 $ - $ 560,116
================ ================ ================
Company's investments in
unconsolidated companies $ 125,655 $ 30,786 $ 543,259
================ ================ ================
AS OF DECEMBER 31, 2002
-------------------------------------------------------------------------
BALANCE SHEETS: THE WOODLANDS OTHER RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS
- ----------------------------------- ---------------- ---------------- ---------------- ----------------
Real estate, net $ 388,587 $ 68,235 $ 81,510 $ 1,238,810
Cash 15,289 7,112 3,022 13,213
Other assets 46,934 3,303 4,415 88,327
---------------- ---------------- ---------------- ----------------
Total assets $ 450,810 $ 78,650 $ 88,947 $ 1,340,350
================ ================ ================ ================
Notes payable $ 284,547 $ - $ 56,000 $ 574,931
Notes payable to the Company 10,625 - - -
Other liabilities 70,053 19,125 5,996 9,579
Equity 85,585 59,525 26,951 755,840
---------------- ---------------- ---------------- ----------------
Total liabilities and equity $ 450,810 $ 78,650 $ 88,947 $ 1,340,350
================ ================ ================ ================
Company's share of unconsolidated
debt $ 120,933 $ - $ 28,000 $ 229,972
================ ================ ================ ================
Company's investments in
unconsolidated companies $ 33,960 $ 39,187 $ 13,473 $ 304,545
================ ================ ================ ================
BALANCE SHEETS: AS OF DECEMBER 31, 2002
------------------------------------------------------
(in thousands) OFFICE OTHER TOTAL
- ----------------------------------- ---------------- ---------------- ----------------
Real estate, net $ 845,019
Cash 43,296
Other assets 35,609
----------------
Total assets $ 923,924
================
Notes payable $ 507,679
Notes payable to the Company -
Other liabilities 53,312
Equity 362,933
----------------
Total liabilities and equity $ 923,924
================
Company's share of unconsolidated
debt $ 180,132 $ - $ 559,037
================ ================ ================
Company's investments in
unconsolidated companies $ 133,530 $ 37,948 $ 562,643
================ ================ ================
25
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
----------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- -------------- ------------- ------------ ----- --------- ------ ----- -----
Total revenues $ 82,644 $ 397 $ 31,495 $ 90,722 $ 107,601
--------- ------- -------- --------- ---------
Expenses:
Operating expense 63,950 319 22,794 18,322 (1) 41,934
Interest expense 5,174 - 2,405 30,853 20,486
Depreciation and
amortization 5,235 - 2,205 43,963 24,326
Tax expense - - 25 642 -
Other (income) expense - - - (2,031) -
--------- ------- -------- --------- ---------
Total expenses $ 74,359 $ 319 $ 27,429 $ 91,749 $ 86,746
--------- ------- -------- --------- ---------
Gain on sale of properties - - - 1,452 -
--------- ------- -------- --------- ---------
Net income $ 8,285 $ 78 $ 4,066 $ 425 (1) $ 20,855
========= ======= ======== ========= =========
Company's equity in net income
(loss) of unconsolidated companies $ 4,350 $ (115) $ 2,036 $ 152 $ 8,797 $ (1,679) $ 13,541
========= ======= ======== ========= ========= ======== ========
SUMMARY STATEMENTS OF OPERATIONS:
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------------------
OTHER
THE WOODLANDS RESIDENTIAL TEMPERATURE-
LAND DEVELOPMENT DEVELOPMENT RESORT/ CONTROLLED
(in thousands) COMPANY, L.P. CORPORATIONS HOTEL LOGISTICS OFFICE OTHER TOTAL
- -------------- ------------- ------------ ----- --------- ------ ----- -----
Total revenues $ 98,128 $ 82,944 $ 26,599 $ 81,762 $ 70,250
--------- --------- -------- -------- --------
Expenses:
Operating expense 54,919 76,798 22,534 12,492 (1) 32,082
Interest expense 3,578 399 4,080 32,324 13,584
Depreciation and
amortization 2,591 1,268 2,667 44,140 16,733
Tax expense 406 (78) - - -
Other (income) expense - - - 2,377 -
--------- --------- -------- -------- --------
Total expenses $ 61,494 $ 78,387 $ 29,281 $ 91,333 $ 62,399
--------- --------- -------- -------- --------
Net income $ 36,634 $ 4,557 $ (2,682) $ (9,571)(1)(2) $ 7,851
========= ========= ======== ======== ========
Company's equity in net income
(loss) of unconsolidated
companies $ 19,018 $ 3,916 $ (91) $ (3,828) $ 3,655 $ (5,281) $ 17,389
========= ========= ======== ======== ======== ======== ========
- --------------------
(1) Inclusive of the preferred return paid to Vornado Realty Trust (1% per
annum of the total combined assets).
(2) Excludes the goodwill write-off for the Temperature-Controlled Logistics
Properties, which was recorded as a cumulative change in accounting
principle in the accompanying financial statements.
26
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNCONSOLIDATED DEBT ANALYSIS
The significant terms of the Company's share of unconsolidated debt
financing arrangements existing as of September 30, 2003 are shown below.
BALANCE COMPANY'S SHARE
OUTSTANDING AT OF BALANCE AT INTEREST RATE AT
DESCRIPTION SEPT. 30, 2003 SEPT. 30, 2003 SEPT. 30, 2003
- ----------------------------------------------------- -------------- -------------- --------------
TEMPERATURE CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Company
Goldman Sachs Notes (1) $ 499,199 $ 199,679 6.89%
Various Capital Leases 36,641 14,657 4.84 to 13.63%
Various Mortgage Notes 27,423 10,969 7.00 to 12.88%
---------- -----------
$ 563,263 $ 225,305
---------- -----------
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Company(2)(3)(4)(5) $ 131,147 $ 65,574 5.47%
Crescent 5 Houston Center L.P. - 25% Company (6) 90,000 22,500 5.00%
Crescent Miami Center, L.L.C. - 40% Company 81,000 32,400 5.04%
Houston PT Four Westlake Park Office Limited
Partnership - 20% Company 48,250 9,650 7.13%
Crescent Five Post Oak Park, L.P. - 30% Company 45,000 13,500 4.82%
Austin PT Bank One Tower Office Limited
Partnership - 20% Company 37,527 7,505 7.13%
Houston PT Three Westlake Park Office Limited
Partnership - 20% Company 33,000 6,600 5.61%
The Woodlands Commercial Properties Co. - 42.5%
Company
Fleet National Bank credit facility (7) 55,000 23,375 4.13%
Fleet National Bank (3)(8) 2,854 1,213 3.13%
---------- -----------
$ 523,778 $ 182,317
---------- -----------
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5%
Company
Fleet National Bank credit facility (7) $ 230,000 $ 97,750 4.13%
Fleet National Bank (9) 37,587 15,974 4.10%
Fleet National Bank (3)(8) 5,854 2,488 3.13%
Various Mortgage Notes 14,839 6,307 3.50 to 6.25%
Blue River Land Company, L.L.C. - 50% Company (10) 7,650 3,825 4.14%
---------- -----------
$ 295,930 $ 126,344
---------- -----------
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Company
Corus Bank (3)(11) 52,300 26,150 5.11%
---------- -----------
TOTAL UNCONSOLIDATED DEBT $1,435,271 $ 560,116
========== ===========
FIXED RATE/WEIGHTED AVERAGE 6.72%
VARIABLE RATE/WEIGHTED AVERAGE 4.59%
----
TOTAL WEIGHTED AVERAGE 5.82%(12)
----
FIXED/VARIABLE
DESCRIPTION MATURITY DATE SECURED/UNSECURED
- ----------------------------------------------------- ------------- -----------------
TEMPERATURE CONTROLLED LOGISTICS SEGMENT:
Vornado Crescent Portland Partnership - 40% Company
Goldman Sachs Notes (1) 5/11/2023 Fixed/Secured
Various Capital Leases 6/1/2006 to 4/1/2017 Fixed/Secured
Various Mortgage Notes 12/1/2003 to 4/1/2009 Fixed/Secured
OFFICE SEGMENT:
Main Street Partners, L.P. - 50% Company(2)(3)(4)(5) 12/1/2004 Variable/Secured
Crescent 5 Houston Center L.P. - 25% Company (6) 10/1/2008 Fixed/Secured
Crescent Miami Center, L.L.C. - 40% Company 9/25/2007 Fixed/Secured
Houston PT Four Westlake Park Office Limited
Partnership - 20% Company 8/1/2006 Fixed/Secured
Crescent Five Post Oak Park, L.P. - 30% Company 1/1/2008 Fixed/Secured
Austin PT Bank One Tower Office Limited
Partnership - 20% Company 8/1/2006 Fixed/Secured
Houston PT Three Westlake Park Office Limited
Partnership - 20% Company 9/1/2007 Fixed/Secured
The Woodlands Commercial Properties Co. - 42.5%
Company
Fleet National Bank credit facility (7) 11/27/2005 Variable/Secured
Fleet National Bank (3)(8) 10/31/2003 Variable/Secured
RESIDENTIAL DEVELOPMENT SEGMENT:
The Woodlands Land Development Co. - 42.5%
Company
Fleet National Bank credit facility (7) 11/27/2005 Variable/Secured
Fleet National Bank (9) 12/31/2005 Variable/Secured
Fleet National Bank (3)(8) 10/31/2003 Variable/Secured
Various Mortgage Notes 7/1/2005 to 12/31/2008 Fixed/Secured
Blue River Land Company, L.L.C. - 50% Company (10) 6/30/2004 Variable/Secured
RESORT/HOTEL SEGMENT:
Manalapan Hotel Partners, L.L.C. - 50% Company
Corus Bank (3)(11) 10/21/2005 Variable/Secured
TOTAL UNCONSOLIDATED DEBT
FIXED RATE/WEIGHTED AVERAGE 14.1 years
VARIABLE RATE/WEIGHTED AVERAGE 1.9 years
----------
TOTAL WEIGHTED AVERAGE 8.9 years
----------
- -----------------------
(1) URS Real Estate, L.P. and Americold Real Estate, L.P., subsidiaries of the
Temperature-Controlled Logistics Corporation, expect to repay the notes on
the Optional Prepayment Date of April 11, 2008.
(2) Senior Note - Note A: $82.5 million at variable interest rate, LIBOR + 189
basis points, $4.9 million at variable interest rate, LIBOR + 250 basis
points with a LIBOR floor of 2.50%. Note B: $24.3 million at variable
interest rate, LIBOR + 650 basis points with a LIBOR floor of 2.50%.
Mezzanine Note - $19.4 million at variable interest rate, LIBOR + 890 basis
points with a LIBOR floor of 3.0%. An interest-rate cap agreement which
limits interest rate exposure to a maximum LIBOR of 4.52% is in place on
all notes. All notes amortized based on a 25-year schedule.
(3) This facility has two one-year extension options.
(4) The Company and its joint venture partner each obtained a separate letter
of credit to guarantee the repayment of up to $4.3 million each of the Main
Street Partners, L.P. loan.
(5) Under the terms of this loan, the Property must maintain certain coverage
ratios in order for the Partnership to distribute cash. As of September 30,
2003, the Property income was not sufficient to provide the minimum
coverage. While this situation does not constitute a default under the
loan, the Partnership will not be permitted to distribute cash during the
period of non-compliance.
(6) The construction loan for 5 Houston Center was refinanced and converted to
a mortgage loan on September 8, 2003.
(7) Woodlands CPC and WLDC entered into two $50 million interest rate swap
agreements, which limit interest rate exposure on the combined notional
amount of $100 million to a LIBOR rate of 1.735% plus 300 basis points
spread over LIBOR.
(8) Woodlands CPC and WLDC entered into an interest rate cap agreement which
limits interest rate exposure on the notional amount of $33.8 million to a
maximum LIBOR rate of 9.0% plus 200 basis points spread over LIBOR.
(9) WLDC entered into an interest rate cap agreement which limits interest rate
exposure on the notional amount of $19.5 million to a maximum LIBOR rate of
8.5% plus 275 basis points spread over LIBOR.
(10) The variable rate loan has an interest rate of LIBOR + 300 basis points. A
fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides a
guarantee of up to 70% of the outstanding balance of up to a $9.0 million
loan to Blue River Land Company, L.L.C. There was approximately $7.7
million outstanding at September 30, 2003 and the amount guaranteed was
$5.4 million.
(11) The Company and its joint venture partner each obtained a separate letter
of credit to guarantee repayment of up to $3.0 million each of this
facility.
(12) The overall weighted average interest rate does not include the effect of
the Company's cash flow hedge agreements. Including the effect of these
agreements, the overall weighted average interest rate would have been
5.87%.
27
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows, as of September 30, 2003, information about
the Company's share of unconsolidated fixed and variable rate debt and does not
take into account any extension options, hedge arrangements or the entities'
anticipated pay-off dates.
PERCENTAGE OF WEIGHTED WEIGHTED AVERAGE
(in thousands) BALANCE DEBT(1) AVERAGE RATE MATURITY
- -------------- ------- ------- ------------ --------
Fixed Rate Debt $ 323,767 57.8% 6.72% 14.1 years
Variable Rate Debt 236,349 42.2 4.59 1.9 years
--------- ----- ---- ---------
Total Debt $ 560,116 100.0% 5.82% 8.9 years
========= ===== ==== =========
- ----------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $42.5 million of hedged variable rate debt, are
65% and 35%, respectively.
Listed below is the Company's share of aggregate principal payments, by
year, required as of September 30, 2003, related to the Company's unconsolidated
debt. Scheduled principal installments and amounts due at maturity are included.
SECURED
(in thousands) DEBT(1)
- ------------- ---------
2003 $ 12,027
2004 86,910
2005 162,286
2006 23,977
2007 48,384
Thereafter 226,532
---------
$ 560,116
=========
- -----------------------
(1) These amounts do not reflect the effect of extension options.
28
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. NOTES PAYABLE AND BORROWINGS UNDER CREDIT FACILITY
The following is a summary of the Company's debt financing at September
30, 2003:
September 30, 2003
------------------
(in thousands)
Secured Debt
Fleet Fund I and II Term Loan (1) due May 2005, bears interest at LIBOR plus 325
basis points (at September 30, 2003, the interest rate was 4.38%), with a
four-year interest-only term, secured by equity interests in Funding I and II
Properties.................................................................................. $ 275,000
AEGON Partnership Note (2) due July 2009, bears interest at 7.53% with monthly
principal and interest payments based on a 25-year amortization schedule,
secured by the Funding III, IV and V Properties............................................. 261,412
LaSalle Note I(3) due August 2027, bears interest at 7.83% with monthly
principal and interest payments based on a 25-year amortization schedule through
maturity in August 2027, secured by the Funding I Properties................................ 235,829
Deutsche Bank-CMBS Loan(4) due May 2004, bears interest at the 30-day LIBOR rate
plus 234 basis points (at September 30, 2003, the interest rate was 5.84%), with
a three-year interest-only term and two one-year extension options, secured by
the Funding X Properties and Spectrum Center................................................ 220,000
JP Morgan Mortgage Note(5) bears interest at 8.31% with monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
October 2016, secured by the Houston Center mixed-use Office Property
Complex..................................................................................... 192,395
LaSalle Note II(6) bears interest at 7.79% with an initial seven-year
interest-only term (through March 2003), followed by monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
March 2028, secured by the Funding II Properties............................................ 160,072
Cigna Note(7) due June 2010, bears interest at 5.22% with an interest-only term,
secured by the 707 17th Street Office Property.............................................. 70,000
National Bank of Arizona Revolving Line of Credit(8) with maturities ranging
from November 2004 to December 2005, bears interest ranging from 4.00% to 5.00%,
secured by certain DMDC assets.............................................................. 49,191
Bank of America Note(9) due May 2013, bears interest at 5.53% with an initial
2.5-year interest-only term (through November 2005), followed by monthly
principal and interest payments based on a 30-year amortization schedule,
secured by The Colonnade Office Property.................................................... 38,000
Metropolitan Life Note V(10) due December 2005, bears interest at 8.49% with
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Datran Center Office Property...................................... 37,667
Northwestern Life Note(11) due January 2004, bears interest at 7.66% with an
interest-only term, secured by the 301 Congress Avenue Office Property...................... 26,000
Woodmen of the World Note(12) due April 2009, bears interest at 8.20% with an
initial five-year interest-only term (through November 2006), followed by
monthly principal and interest payments based on a 25-year amortization
schedule, secured by the Avallon IV Office Property......................................... 8,500
Nomura Funding VI Note(13) bears interest at 10.07% with monthly principal and
interest payments based on a 25-year amortization schedule through maturity in
July 2020, secured by the Funding VI Property............................................... 7,898
29
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
------------------
(in thousands)
Secured Debt (Continued)
Mitchell Mortgage Note due December 2003, bears interest at 7.0% with an
interest-only term, secured by one of The Woodlands Office Properties....................... 1,743
FHI Finance Loan bears interest at LIBOR plus 450 basis points (at September 30,
2003, the interest rate was 5.62%), with an initial interest only term until the
Net Operating Income Hurdle Date(14), followed by monthly principal and interest
payments based on a 20-year amortization schedule through maturity in September
2009, secured by the Sonoma Mission Inn & Spa............................................... 435
Construction, acquisition and other obligations, bearing fixed and variable
interest rates ranging from 2.9% to 11.25% at September 30, 2003, with
maturities ranging between October 2003 and September 2008, secured by various
CRDI and MVDC projects(15).................................................................. 45,827
Unsecured Debt
2009(16) Notes bear interest at a fixed rate of 9.25% with a seven-year
interest-only term, due April 2009 with a call date of April 2006........................... 375,000
2007(16) Notes bear interest at a fixed rate of 7.50% with a ten-year
interest-only term, due September 2007...................................................... 250,000
Credit Facility(17) interest only due May 2004, bears interest at LIBOR plus
187.5 basis points (at September 30, 2003, the interest rate was 3.00%), with a
one-year extension option................................................................... 314,500
JP Morgan Loan Sales Facility(18), bears interest at the federal funds rate plus
150 basis points (at September 30, 2003, the interest rate was 2.50%)....................... 7,000
------------
Total Notes Payable $ 2,576,469
============
- -----------------
(1) In October 2003, the Company received approval from the lending group to
modify key financial and other covenants in the Fleet I and II Term Loan.
In connection with these modifications, the Company agreed to increase the
interest rate on this loan to LIBOR plus 350 basis points.
(2) The outstanding balance of this note at maturity will be approximately
$224.1 million.
(3) In August 2007, the interest rate will increase, and the Company is
required to remit, in addition to the monthly debt service payment, excess
property cash flow, as defined, to be applied first against principal and
thereafter against accrued excess interest, as defined. It is the Company's
intention to repay the note in full at such time (August 2007) by making a
final payment of approximately $221.7 million.
(4) This includes both a Deutsche Bank-CMBS note and a Fleet-Mezzanine note.
The notes are due May 2004 and bear interest at the 30-day LIBOR rate plus
a spread of (i) 164.7 basis points for the CMBS note (at September 30,
2003, the interest rate was 5.147%), and (ii) 600 basis points for the
Mezzanine note (at September 30, 2003, the interest rate was 9.5%). The
blended rate at September 30, 2003 for the two notes was 5.84%. Both notes
have a LIBOR floor of 3.5%. The notes have three-year interest only terms
and two one-year extension options. The Fleet-Mezzanine note is secured by
the Company's interests in Funding X and Crescent Spectrum Center, L.P. and
the Company's interest in their general partner.
(5) In October 2006, the interest rate will adjust based on current interest
rates at that time. It is the Company's intention to repay the note in full
at such time (October 2006) by making a final payment of approximately
$177.8 million.
(6) In March 2006, the interest rate will increase, and the Company is required
to remit, in addition to the monthly debt service payment, excess property
cash flow, as defined, to be applied first against principal and
thereafter, against accrued excess interest, as defined. It is the
Company's intention to repay the note in full at such time (March 2006) by
making a final payment of approximately $154.5 million.
(7) During the first quarter of 2003, the Company paid the $63.5 million Cigna
Note, bearing interest at 7.47%, which matured in March 2003, in full with
a draw under the Company's credit facility.
(8) This facility is a $51.8 million line of credit secured by certain DMDC
land and improvements ("vertical facility"), club facilities ("club loan"),
notes receivable ("warehouse facility") and additional land ("short-term
facility"). The line restricts the vertical facility and club loan to a
maximum outstanding amount of $40.0 million and is subject to certain
borrowing base limitations and bears interest at prime (at September 30,
2003, the interest rate was 4.0%). The warehouse facility bears interest at
prime plus 100 basis points (at September 30, 2003, the interest rate was
5.0%) and is limited to $10.0 million. The short-term facility bears
interest at prime plus 50 basis points (at September 30, 2003, the interest
rate was 4.5%) and is limited to $1.8 million. The blended rate at
September 30, 2003 for the vertical facility and club loan, the warehouse
facility and the short-term facility was 4.2%.
(9) The outstanding principal balance of this loan at maturity will be
approximately $33.4 million.
(10) The outstanding principal balance of this loan at maturity will be
approximately $36.1 million.
(11) The Company has extended the loan maturity to November 2008 with
Northwestern Mutual. The new loan has an interest rate of 4.94%.
(12) The outstanding principal balance of this loan at maturity will be
approximately $8.2 million.
(13) In July 2010, the interest rate will adjust based on current interest rates
at that time. It is the Company's intention to repay the note in full at
such time (July 2010) by making a final payment of approximately $6.1
million.
(14) The Company's joint venture partner, which owns a 19.9% interest in the
Sonoma Mission Inn & Spa, has a commitment to fund $10.0 million of future
renovations at the Sonoma Mission Inn & Spa through a mezzanine loan. The
Net Operating Income Hurdle Date, as defined in the loan
30
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreement, is the date as of which the Sonoma Mission Inn & Spa has
achieved an aggregate Adjusted Net Operating Income, as defined in the loan
agreement, of $12 million for a period of 12 consecutive calendar months.
(15) In June 2003, CRDI entered into an interest rate cap agreement with Bank of
America with an initial notional amount of $0.8 million, increasing monthly
to up to $28.3 million in September 2004, based on the amount of the loan.
The agreement limits the interest rate exposure on the notional amount to a
maximum prime rate, as defined in the agreement, of 4.1%.
(16) The Notes were issued in offerings registered with the Securities and
Exchange Commission.
(17) The $400.0 million Credit Facility with Fleet is an unsecured revolving
line of credit to Funding VIII and guaranteed by the Operating Partnership.
Availability under the line of credit is subject to certain covenants
including limitations on total leverage, fixed charge ratio, debt service
coverage, minimum tangible net worth, and specific mix of office and hotel
assets and average occupancy of Office Properties. At September 30, 2003,
the maximum borrowing capacity under the credit facility was $383.6
million. The outstanding balance excludes letters of credit issued under
the Company's credit facility of $15.2 million which reduce the Company's
maximum borrowing capacity. In October 2003, the Company received approval
from the lending group to modify key financial and other covenants in the
Credit Facility. In connection with these modifications, the Company agreed
to increase the interest rate on this facility to LIBOR plus 212.5 basis
points.
(18) The JP Morgan Loan Sales Facility is an uncommitted $50.0 million unsecured
credit facility. The Operating Partnership maintains sufficient
availability under the Fleet Facility to repay this loan at any time due to
lack of obligation by the lender to fund the loan.
The following table shows information about the Company's consolidated
fixed and variable rate debt and does not take into account any extension
options, hedging arrangements or the Company's anticipated payoff dates.
WEIGHTED
PERCENTAGE AVERAGE WEIGHTED AVERAGE
(in thousands) BALANCE OF DEBT (1) RATE MATURITY
- -------------- ------- ----------- -------- -----------------
Fixed Rate Debt $ 1,677,547 65.1% 7.95% 10.6 years
Variable Rate Debt 898,922 34.9 4.09 1.0 years
------------- ----- ---- ---------
Total Debt $ 2,576,469 100.0% 6.65%(2) 6.9 years
============= ===== ==== =========
- -----------------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
85% and 15%, respectively.
(2) Including the effect of hedge arrangements, the overall weighted average
interest rate would have been 6.73%.
Listed below are the aggregate principal payments by year required as
of September 30, 2003 under indebtedness of the Company. Scheduled principal
installments and amounts due at maturity are included.
SECURED UNSECURED UNSECURED DEBT
(in thousands) DEBT DEBT LINE OF CREDIT TOTAL(1)
- -------------- --------- ---------- -------------- --------
2003 $ 17,643 $ 7,000 $ - $ 24,643
2004 285,554 - 314,500 600,054
2005 381,903 - - 381,903
2006 18,920 - - 18,920
2007 26,892 250,000 - 276,892
Thereafter 899,057 375,000 - 1,274,057
----------- ---------- --------- ------------
$ 1,629,969 $ 632,000 $ 314,500 $ 2,576,469
=========== ========== ========= ============
- ----------------------------
(1) These amounts do not reflect the effect of a one-year extension option on
the credit facility and two one-year extension options on the Deutsche
Bank-CMBS Loan.
The Company has $24.6 million of debt maturing through December 31,
2003, consisting primarily of debt related to the Residential Development
Segment. The Company plans to meet these maturing debt obligations, primarily
through cash from operations, construction loan refinancings, and additional
borrowings under the Company's credit facility or additional debt facilities.
The Company is generally obligated by its debt agreements to comply
with financial covenants, affirmative covenants and negative covenants, or some
combination of these types of covenants. Failure to comply with covenants under
the Credit Facility or other debt instruments could result in an event of
default under one or more of the Company's debt instruments. Any uncured or
unwaived events of default under the Company's loans can trigger an increase in
interest rates, an acceleration of payment on the loan in default or, for the
Company's secured debt, foreclosure on the Property securing the debt. In
addition, an event of default by the Company or any of its subsidiaries with
respect to any indebtedness in excess of $5.0 million generally will result in
an event of default under the Credit Facility and the Fleet Fund I and II Term
Loan after the notice and cure periods for the other indebtedness have passed.
As of September 30, 2003, no event of default had occurred, and the Company was
in compliance with all of its covenants related to its outstanding debt. The
Company's debt facilities generally prohibit loan prepayment for
31
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an initial period, allow prepayment with a penalty during a following specified
period and allow prepayment without penalty after the expiration of that period.
During the nine months ended September 30, 2003, there were no circumstances
that required prepayment or increased collateral related to the Company's
existing debt.
In addition to the subsidiaries listed in Note 1, "Organization and
Basis of Presentation," certain other subsidiaries of the Company were formed
primarily for the purpose of obtaining secured and unsecured debt or joint
venture financings. These entities, all of which are consolidated and are
grouped based on the Properties to which they relate, are: Funding I and Funding
II Properties (CREM Holdings, LLC, Crescent Capital Funding, LLC, Crescent
Funding Interest, LLC, CRE Management I Corp., CRE Management II Corp.); Funding
III Properties (CRE Management III Corp.); Funding IV Properties (CRE Management
IV Corp.); Funding V Properties (CRE Management V Corp.); Funding VI Properties
(CRE Management VI Corp.); Funding VIII Properties (CRE Management VIII, LLC);
707 17th Street Property (CRE Management IX, LLC); Funding X Properties (CREF X
Holdings Management, LLC, CREF X Holdings, L.P., CRE Management X, LLC);
Spectrum Center (Spectrum Mortgage Associates, L.P., CSC Holdings Management,
LLC, Crescent SC Holdings, L.P., CSC Management, LLC), The BAC-Colonnade (CEI
Colonnade Holdings, LLC), and Crescent Finance Company.
10. CASH FLOW HEDGES
The Company uses derivative financial instruments to convert a portion
of its variable rate debt to fixed rate debt and to manage its fixed to variable
rate debt ratio. As of September 30, 2003, the Company had four cash flow hedge
agreements which are accounted for in conformity with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133."
The following table shows information regarding the Company's cash flow
hedge agreements during the nine months ended September 30, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL INTEREST UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE EXPENSE (LOSSES) IN OCI
- -------------- -------- -------- --------- ----------- ------------------- ----------------
(in thousands)
- --------------
9/01/99 $ 200,000 9/02/03 6.18% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (3,346) 4,179 3,738
2/15/03 100,000 2/15/06 3.26% (3,280) 1,286 (752)
2/15/03 100,000 2/15/06 3.25% (3,273) 1,285 (754)
9/02/03 200,000 9/01/06 3.72% (9,094) 419 (3,976)
--------- ---------- ---------
$ (18,993) $ 14,779 $ 5,819
========= ========== =========
The Company has designated its four cash flow hedge agreements as cash
flow hedges of LIBOR-based monthly interest payments on a designated pool of
variable rate LIBOR indexed debt that re-prices closest to the reset dates of
each cash flow hedge agreement. For retrospective effectiveness testing, the
Company uses the cumulative dollar offset approach as described in DIG Issue E8.
The DIG is a task force designed to assist the FASB in answering questions that
companies have resulting from implementation of SFAS No. 133 and SFAS No. 138.
The Company uses the change in variable cash flows method as described in DIG
Issue G7 for prospective testing as well as for the actual recording of
ineffectiveness, if any. Under this method, the Company will compare the changes
in the floating rate portion of each cash flow hedge to the floating rate of the
hedged items. The cash flow hedges have been and are expected to remain highly
effective. Changes in the fair value of these highly effective hedging
instruments are recorded in OCI. The effective portion that has been deferred in
OCI will be reclassified to earnings as interest expense when the hedged items
impact earnings. If a cash flow hedge falls outside 80%-125% effectiveness for a
quarter, all changes in the fair value of the cash flow hedge for the quarter
will be recognized in earnings during the current period. If it is determined
based on prospective testing that it is no longer likely a hedge will be highly
effective on a prospective basis, the hedge will no longer be designated as a
cash flow hedge and no longer qualify for accounting in conformity with SFAS
Nos. 133 and 138.
CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt.
32
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest during the nine months ended
September 30, 2003. Unlike the additional interest on the Company's cash flow
hedges, which was expensed, the additional interest on CRDI's cash flow hedges
was capitalized, as it is related to debt incurred for projects that are
currently under development. Also presented are the unrealized gains in OCI for
the nine months ended September 30, 2003.
ADDITIONAL CHANGE IN
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
DATE AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- ---- ------ ---- ---- ----- ----------- ------------
(in thousands)
9/4/01 $ 4,650 9/4/03 4.12% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
----------- ----------- ------------
$ - $ 163 $ 180
=========== =========== ============
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America with an initial notional amount of $0.8 million, increasing
monthly to up to $28.3 million in September 2004, based on the amount of the
loan. The agreement limits the interest rate on the notional amount to a maximum
prime rate, as defined in the agreement, of 4.1%.
CRDI uses the shortcut method described in SFAS No. 133, which
eliminates the need to consider ineffectiveness of the hedges, and instead
assumes that the hedges are highly effective.
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
GUARANTEE COMMITMENTS
The FASB issued Interpretation 45 requiring a guarantor to disclose its
guarantees. The Company's guarantees in place as of September 30, 2003 are
listed in the table below. For the guarantees on indebtedness, no triggering
events or conditions are anticipated to occur that would require payment under
the guarantees and management believes the assets associated with the loans that
are guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Company to provide additional
collateral to support the guarantees.
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING AT GUARANTEED
DEBTOR SEPTEMBER 30, 2003 AMOUNT
- ----------------------------------------------------------------- ------------------ ----------
(in thousands)
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 15,197 $ 15,197
Blue River Land Company, L.L.C.(2)(3) 5,355 6,300
Main Street Partners, L.P. - Letter of Credit (2)(4) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit (2)(5) 3,000 3,000
------------------ ----------
Total Guarantees $ 27,802 $ 28,747
================== ==========
- ------------------------------
(1) The Company provides a $15.2 million letter of credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan
District Revenue Development Bonds and Limited Tax Bonds.
(2) See Note 8, "Investments in Unconsolidated Companies - Unconsolidated
Debt Analysis," for a description of the terms of this debt.
(3) A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides
a guarantee of 70% of the outstanding balance of up to a $9.0 million
loan to Blue River Land Company, L.L.C. There was approximately $7.7
million outstanding at September 30, 2003 and the amount guaranteed was
$5.4 million.
(4) The Company and its joint venture partner each provide a $4.3 million
letter of credit to guarantee repayment of up to $8.5 million of the
loan to Main Street Partners, L.P.
(5) The Company and its joint venture partner each provide a $3.0 million
letter of credit to guarantee repayment of up to $6.0 million of the
Manalapan debt with Corus Bank.
33
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER COMMITMENTS
On September 23, 2003, the Company entered into a one year option
agreement for the future sale of approximately 1.5 acres of undeveloped
investment land located in Houston, Texas for approximately $7.8 million. The
Company received $0.01 million of consideration in September 2003. The option
agreement may be extended up to four years on a yearly basis at the option of
the prospective purchaser for additional consideration.
See Note 16, "COPI," for a description of the Company's commitments
related to the agreement with COPI, executed on February 14, 2002.
CONTINGENCIES
ENVIRONMENTAL MATTERS
All of the Properties have been subjected to Phase I environmental
assessments, and some Properties have been subjected to Phase II soil and ground
water sampling as part of the Phase I assessments. Such assessments have not
revealed, nor is management aware of, any environmental liabilities that
management believes would have a material adverse effect on the financial
position or results of operations of the Company.
LITIGATION
The Company is involved from time to time in various claims and legal
actions in the ordinary course of business. Management does not believe that the
impact of such matters will have a material adverse effect on the Company's
financial position or its results of operations when resolved.
12. MINORITY INTEREST
Minority interest in the Operating Partnership represents the
proportionate share of the equity in the Operating Partnership of limited
partners other than the Company. The ownership share of limited partners other
than the Company is evidenced by Operating Partnership units. The Operating
Partnership pays a regular quarterly distribution to the holders of Operating
Partnership units.
Each Operating Partnership unit may be exchanged for either two common
shares of the Company or, at the election of the Company, cash equal to the fair
market value of two common shares at the time of the exchange. When a unitholder
exchanges a unit, the Company's percentage interest in the Operating Partnership
increases. During the nine months ended September 30, 2003, there were 4,995
units exchanged for 9,990 common shares of the Company.
Minority interest in real estate partnerships represents joint venture
or preferred equity partners' proportionate share of the equity in certain real
estate partnerships. The Company holds a controlling interest in the real estate
partnerships and consolidates the real estate partnerships into the financial
statements of the Company. Income in the real estate partnerships is allocated
to minority interest based on weighted average percentage ownership during the
year.
The following table summarizes the minority interest liability as of
September 30, 2003 and December 31, 2002:
(in thousands) 2003 2002
- -------------- --------- ---------
Limited partners in the Operating Partnership $ 109,181 $ 130,802
Development joint venture partners - Residential Development Segment 22,822 24,937
Joint venture partners - Office Segment 7,466 11,202
Joint venture partners - Resort/Hotel Segment 7,406 7,833
--------- ---------
$ 146,875 $ 174,774
========= =========
34
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the minority interests' share of net
income (loss) for the nine months ended September 30, 2003 and 2002:
(in thousands) 2003 2002
- -------------- ---------- ----------
Limited partners in the Operating Partnership $ (1,175) $ (6,795)
Development joint venture partners - Residential Development Segment (1,628) (2,651)
Joint venture partners - Office Segment 383 (1,060)
Joint venture partners - Resort/Hotel Segment 523 22
Subsidiary preferred equity - (5,723)
---------- ----------
$ (1,897) $ (16,207)
========== ==========
13. SHAREHOLDERS' EQUITY
DISTRIBUTIONS
The following table summarizes the distributions paid or declared to
common shareholders, unitholders and preferred shareholders during the nine
months ended September 30, 2003 (dollars in thousands, except per share
amounts).
ANNUAL
DIVIDEND/ TOTAL RECORD PAYMENT DIVIDEND/
SECURITY DISTRIBUTION AMOUNT DATE DATE DISTRIBUTION
- ------------------------- ------------ ------------- -------- -------- ------------
Common Shares/Units (1) $ 0.375 $ 43,871 01/31/03 02/14/03 $ 1.50
Common Shares/Units (1) $ 0.375 $ 43,872 04/30/03 05/15/03 $ 1.50
Common Shares/Units (1) $ 0.375 $ 43,873 07/31/03 08/15/03 $ 1.50
Common Shares/Units (1) $ 0.375 $ 43,873 10/31/03 11/14/03 $ 1.50
Series A Preferred Shares $ 0.422 $ 4,556 01/31/03 02/14/03 $ 1.6875
Series A Preferred Shares $ 0.422 $ 4,556 04/30/03 05/15/03 $ 1.6875
Series A Preferred Shares $ 0.422 $ 4,556 07/31/03 08/15/03 $ 1.6875
Series A Preferred Shares $ 0.422 $ 4,556 10/31/03 11/14/03 $ 1.6875
Series B Preferred Shares $ 0.594 $ 2,019 01/31/03 02/14/03 $ 2.3750
Series B Preferred Shares $ 0.594 $ 2,019 04/30/03 05/15/03 $ 2.3750
Series B Preferred Shares $ 0.594 $ 2,019 07/31/03 08/15/03 $ 2.3750
Series B Preferred Shares $ 0.594 $ 2,019 10/31/03 11/14/03 $ 2.3750
- ----------------
(1) Represents one-half the amount of the distribution per unit because each
unit is exchangeable for two common shares.
14. INCOME TAXES
TAXABLE CONSOLIDATED ENTITIES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities of taxable consolidated
entities for financial reporting purposes and the amounts used for income tax
purposes. For the nine months ended September 30, 2003, the taxable consolidated
entities were comprised of the taxable REIT subsidiaries of the Company.
The Company intends to maintain its qualification as a REIT under
Section 856 of the U.S. Internal Revenue Code of 1986, as amended (the "Code").
As a REIT, the Company generally will not be subject to federal corporate income
taxes as long as it satisfies certain technical requirements of the Code,
including the requirement to distribute 90% of REIT taxable income to its
shareholders. Accordingly, the Company does not believe that it will be liable
for current income taxes on its REIT taxable income at the federal level or in
most of the states in which it operates. The Company consolidates certain
taxable REIT subsidiaries, which are subject to federal and state income tax.
For the nine months ended September 30, 2003 and 2002, the Company's federal
income tax benefit was $10.5 million and $6.5 million, respectively. The
Company's $10.5 million income tax benefit at September 30, 2003 consists
primarily of $6.3 million for the Residential Development Segment and $3.7
million for the Resort/Hotel Segment.
35
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's total net tax asset of approximately $54.5 million at
September 30, 2003, includes $32.5 million of net deferred tax assets. SFAS No.
109, "Accounting for Income Taxes," requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. There was no change in the valuation allowance during the nine months
ended September 30, 2003.
15. RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC.
Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2. G2 was formed for the purpose of investing in commercial
mortgage backed securities and other commercial real estate investments and is
managed and controlled by an entity that is owned equally by GMSP and GMACCM.
The G2 general partner is entitled to an annual asset management fee. The
ownership structure of GMSP consists of an approximately 86% limited partnership
interest owned directly and indirectly by Richard E. Rainwater, Chairman of the
Board of Trust Managers of the Company, and an approximately 14% general
partnership interest, of which approximately 6% is owned by Darla Moore, who is
married to Mr. Rainwater, and approximately 6% is owned by John C. Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At September 30, 2003,
DBL had an approximately $13.4 million investment in G2.
On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL from Mr. Goff. Total
consideration paid for Mr. Goff's interest was $0.4 million. The Board of Trust
Managers of the Company, including all the independent trust managers, approved
the transaction based in part on an appraisal of the assets of DBL by an
independent appraisal firm. As a result of this transaction, DBL is wholly-owned
by the Company and is consolidated in the Residential Development Segment as of
and for the nine months ended September 30, 2003. Also, because DBL owns a
majority of the voting stock in MVDC and HADC, the Company consolidated these
two Residential Development Corporations as of and for the nine months ended
September 30, 2003.
LOANS TO EMPLOYEES AND TRUST MANAGERS OF THE COMPANY FOR EXERCISE OF STOCK
OPTIONS AND UNIT OPTIONS
As of September 30, 2003, the Company had approximately $37.8 million
of loans outstanding to certain employees and trust managers of the Company on a
recourse basis pursuant to the Company's stock incentive plans and unit
incentive plans pursuant to an agreement approved by the Board of Trust Managers
and the Executive Compensation Committee of the Company. The proceeds of these
loans were used by the employees and the trust managers to acquire common shares
of the Company pursuant to the exercise of vested stock and unit options.
Pursuant to the loan agreements, these loans may be repaid in full or in part at
any time without premium or penalty. Mr. Goff had a loan representing $26.3
million of the $37.8 million total outstanding loans at September 30, 2003.
Approximately $0.3 million of interest was outstanding related to these loans as
of September 30, 2003. No conditions exist at September 30, 2003 which would
cause any of the loans to be in default. Effective July 29, 2002, the Company
ceased offering to its employees and trust managers the option to obtain loans
pursuant to the Company's stock and unit incentive plans.
OTHER
On June 28, 2002, the Company purchased, and is holding for sale, the
home of an executive officer of the Company for approximately $2.7 million,
which approximates fair market value of the home. This purchase was part of the
officer's relocation agreement with the Company.
16. COPI
In April 1997, the Company established a new Delaware corporation,
COPI. All of the outstanding common stock of COPI, valued at $0.99 per share,
was distributed in a spin-off, effective June 12, 1997, to those persons who
were limited partners of the Operating Partnership or shareholders of the
Company on May 30, 1997.
COPI was formed to become a lessee and operator of various assets to be
acquired by the Company and to perform the intercompany agreement between COPI
and the Company, pursuant to which each party agreed to provide the other with
rights to participate in certain transactions. The Company was not permitted to
operate or lease these assets under the tax
36
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
laws in effect and applicable to REITs at that time. In connection with the
formation and capitalization of COPI, and the subsequent operations and
investments of COPI since 1997, the Company made loans to COPI under a line of
credit and various term loans.
On January 1, 2001, The REIT Modernization Act became effective. This
legislation allows the Company, through its taxable REIT subsidiaries, to
operate or lease certain of its investments that had previously been operated or
leased by COPI.
On February 14, 2002, the Company executed an agreement (the
"Agreement") with COPI, pursuant to which COPI transferred to subsidiaries of
the Company, in lieu of foreclosure, COPI's lessee interests in the eight
Resort/Hotel Properties leased to subsidiaries of COPI and, pursuant to a strict
foreclosure, all of COPI's voting interests in three of the Company's
Residential Development Corporations and other assets. The Company agreed to
assist and provide funding to COPI for the implementation of a pre-packaged
bankruptcy of COPI. In connection with the transfer, COPI's rent and debt
obligations to the Company were reduced.
The Company holds the lessee interests in the eight Resort/Hotel
Properties and the voting interests in the three Residential Development
Corporations through three newly organized entities that are wholly-owned
taxable REIT subsidiaries of the Company. The Company has included these assets
in its Resort/Hotel Segment and its Residential Development Segment, and fully
consolidated the operations of the eight Resort/Hotel Properties and the three
Residential Development Corporations, beginning on the dates of the transfers of
the assets.
The Agreement provides that COPI and the Company will jointly seek to
have a pre-packaged bankruptcy plan for COPI, reflecting the terms of the
Agreement, approved by the bankruptcy court. Under the Agreement, the Company
has agreed to provide approximately $14.0 million to COPI in the form of cash
and common shares of the Company to fund costs, claims and expenses relating to
the bankruptcy and related transactions, and to provide for the distribution of
the Company's common shares to the COPI stockholders. The Company also agreed,
however, that it will issue common shares with a minimum dollar value of
approximately $2.2 million to the COPI stockholders, even if it would cause the
total costs, claims and expenses that it pays to exceed $14.0 million.
Currently, the Company estimates that the value of the common shares that will
be issued to the COPI stockholders will be between approximately $2.2 million
and $3.0 million. The actual value of the common shares issued to the COPI
stockholders will not be determined until the confirmation of COPI's bankruptcy
plan and could vary from the estimated amounts, but will have a value of at
least $2.2 million.
In addition, the Company has agreed to use commercially reasonable
efforts to assist COPI in arranging COPI's repayment of its $15.0 million
obligation to Bank of America, together with any accrued interest. The Company
expects to form and capitalize a new entity ("Crescent Spinco"), to be owned by
the shareholders of the Company. Crescent Spinco then would purchase COPI's
interest in AmeriCold Logistics for between $15.0 million and $15.5 million.
COPI has agreed that it will use the proceeds of the sale of the AmeriCold
Logistics interest to repay Bank of America in full.
COPI obtained the loan from Bank of America primarily to participate in
investments with the Company. At the time COPI obtained the loan, Bank of
America required, as a condition to making the loan, that Richard E. Rainwater,
the Chairman of the Board of Trust Managers of the Company, and John C. Goff,
Vice-Chairman of the Board of Trust Managers and Chief Executive Officer of the
Company, enter into a support agreement with COPI and Bank of America. Pursuant
to the support agreement, Messrs. Rainwater and Goff agreed to make additional
equity investments in COPI if COPI defaulted on payment obligations under its
line of credit with Bank of America and if the net proceeds of an offering of
COPI securities were insufficient to allow COPI to repay Bank of America in
full.
Previously, the Company held a first lien security interest in COPI's
entire membership interest in AmeriCold Logistics. REIT rules prohibit the
Company from acquiring or owning the membership interest that COPI owns in
AmeriCold Logistics. Under the Agreement, the Company agreed to allow COPI to
grant Bank of America a first priority security interest in the membership
interest and to subordinate its own security interest to that of Bank of
America.
On March 6, 2003, the stockholders of COPI approved the pre-packaged
bankruptcy plan for COPI. On March 10, 2003, COPI filed the plan under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Northern District of Texas.
If the COPI bankruptcy plan is approved by bankruptcy court, the
holders of COPI's common stock will receive the Company's common shares. As
stockholders of COPI, Mr. Rainwater and Mr. Goff will also receive the Company's
common shares.
37
CRESCENT REAL ESTATE EQUITIES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Agreement, the current and former directors and
officers of COPI and the current and former trust managers and officers of the
Company also have received a release from COPI of liability for any actions
taken prior to February 14, 2002, and, depending on various factors, will
receive certain liability releases from COPI and its stockholders under the COPI
bankruptcy plan.
Completion and effectiveness of the pre-packaged bankruptcy plan for
COPI is contingent upon a number of conditions, including the approval of the
plan by certain of COPI's creditors and the confirmation of the plan by the
bankruptcy court.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements............................................................ 40
Results of Operations
Three and nine months ended September 30, 2003 and 2002.......................... 41
Liquidity and Capital Resources
Cash Flows for the nine months ended September 30, 2003.......................... 48
Debt Financing........................................................................ 52
Recent Developments................................................................... 55
Unconsolidated Investments............................................................ 57
Significant Accounting Policies....................................................... 59
Funds from Operations Available to Common Shareholders................................ 63
39
FORWARD-LOOKING STATEMENTS
You should read this section in conjunction with the consolidated
interim financial statements and the accompanying notes in Item 1,"Financial
Statements," of this document and the more detailed information contained in the
Company's Form 10-K for the year ended December 31, 2002. In management's
opinion, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation of the unaudited interim financial
statements are included. Capitalized terms used but not otherwise defined in
this section have the meanings given to them in the notes to the consolidated
financial statements in Item 1, "Financial Statements."
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words "anticipates,"
"believes," "expects," "intends," "future," "may," "will," "should," "plans,"
"estimates," "potential," or "continue," or the negative of these terms, or
other similar expressions, identify forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those described in the
forward-looking statements.
The following factors might cause such a difference:
- The Company's ability, at its Office Properties, to timely lease
unoccupied square footage and timely re-lease occupied square footage
upon expiration on favorable terms, which may continue to be adversely
affected by existing real estate conditions (including changes in
vacancy rates in a particular market or markets, decreases in rental
rates, increased competition from other properties or by a general
downturn in the economy);
- Adverse changes in the financial condition of existing tenants;
- Further deterioration in the resort/business-class hotel markets or in
the market for residential land or luxury residences, including
single-family homes, townhomes and condominiums, or in the economy
generally;
- Financing risks, such as the Company's ability to generate revenue
sufficient to service and repay existing or additional debt, increases
in debt service associated with increased debt and with variable rate
debt, the Company's ability to meet financial and other covenants and
the Company's ability to consummate financings and refinancings on
favorable terms and within any applicable time frames;
- The ability of the Company to consummate anticipated office
acquisitions and investment land and other dispositions on favorable
terms and within anticipated time frames;
- Further or continued adverse conditions in the temperature-controlled
logistics business (including both industry-specific conditions and a
general downturn in the economy) which may further jeopardize the
ability of the tenant to pay all current and deferred rent due;
- The inability of the Company to complete the distribution to its
shareholders of the shares of a new entity to purchase the AmeriCold
Logistics tenant interest from COPI;
- The concentration of a significant percentage of the Company's assets
in Texas;
- The existence of complex regulations relating to the Company's status
as a REIT, the effect of future changes in REIT requirements as a
result of new legislation and the adverse consequences of the failure
to qualify as a REIT; and
- Other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue
reliance on such statements. The Company is not obligated to update these
forward-looking statements to reflect any future events or circumstances.
40
RESULTS OF OPERATIONS
The following table shows the Company's financial data as a percentage
of total revenue for the three and nine months ended September 30, 2003 and
2002, and the variance in dollars between the three and nine months ended
September 30, 2003 and 2002.
FINANCIAL DATA AS A FINANCIAL DATA AS A TOTAL VARIANCE IN TOTAL VARIANCE IN
PERCENTAGE OF TOTAL PERCENTAGE OF TOTAL DOLLARS BETWEEN DOLLARS BETWEEN
REVENUES FOR THE THREE REVENUES FOR THE NINE THE THREE MONTHS THE NINE MONTHS
MONTHS ENDED SEPT 30, MONTHS ENDED SEPT 30, ENDED SEPT 30, ENDED SEPT 30,
---------------------- --------------------- ----------------- -----------------
(in millions) (in millions)
2003 2002 2003 2002 2003 AND 2002 2003 AND 2002
---- ---- ---- ---- ------------- -------------
REVENUE:
Office Property 60.0 % 59.0 % 56.5 % 56.5 % $ (13.8) $ (35.1)
Resort/Hotel Property 25.9 23.5 25.6 20.4 (1.4) 22.0
Residential Development Property 14.1 17.5 17.9 23.1 (12.0) (49.0)
------ ----- ----- ----- --------- --------
TOTAL PROPERTY REVENUE 100.0 % 100.0 % 100.0 % 100.0 % (27.2) (62.1)
------ ----- ----- ----- --------- --------
EXPENSE:
Office Property real estate taxes 7.4 % 7.2 % 7.6 % 7.8 % (1.7) (6.0)
Office Property operating expenses 20.8 17.8 19.4 17.1 1.4 4.5
Resort/Hotel Property expense 21.2 18.7 20.6 15.2 0.3 26.6
Residential Development Property expense 14.0 16.5 16.6 21.0 (9.6) (42.5)
------ ----- ----- ----- --------- --------
TOTAL PROPERTY EXPENSE 63.4 % 60.2 % 64.2 % 61.1 % (9.6) (17.4)
------ ----- ----- ----- --------- --------
INCOME FROM PROPERTY OPERATIONS 36.6 % 39.8 % 35.8 % 38.9 % (17.6) (44.7)
------ ----- ----- ----- --------- --------
OTHER INCOME (EXPENSE):
Income from investment land sales, net 5.4 % 2.3 % 2.0 % 0.7 % 5.9 7.4
Gain on joint venture of properties, net 0.0 7.4 0.0 2.4 (17.7) (17.6)
Interest and other income 0.6 0.7 0.6 0.8 (0.5) (1.7)
Corporate general and administrative (3.8) (3.4) (3.1) (2.7) 0.2 (0.7)
Interest expense (20.3) (19.7) (19.4) (18.6) 4.1 6.4
Amortization of deferred financing costs (1.3) (1.1) (1.2) (1.1) (0.1) 0.0
Depreciation and amortization (17.8) (15.4) (16.7) (14.0) (1.0) (9.0)
Impairment charges related to real
estate assets 0.0 0.0 (0.2) (0.1) 0.0 (0.2)
Other expenses (0.1) 0.0 (0.2) 0.0 (0.1) (1.0)
Equity in net income (loss) of
unconsolidated companies:
Office Properties 2.6 0.4 1.3 0.5 4.6 5.1
Resort/Hotel Properties 0.0 (0.1) 0.3 0.0 0.0 2.1
Residential Development Properties 0.8 1.8 0.6 3.1 (2.6) (18.7)
Temperature-Controlled Logistics
Properties (0.5) (1.3) 0.0 (0.5) 2.2 4.0
Other (0.4) (0.3) (0.1) (0.7) (0.1) 3.6
------ ----- ----- ----- --------- --------
TOTAL OTHER INCOME (EXPENSE) (34.8)% (28.7)% (36.1)% (30.2)% (5.1) (20.3)
------ ----- ----- ----- --------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTERESTS AND INCOME TAXES 1.8 % 11.1 % (0.3)% 8.7 % (22.7) (65.0)
Minority interests (0.7) (1.8) (0.3) (2.3) 2.7 14.3
Income tax benefit 2.3 1.1 1.6 0.9 2.4 4.0
------ ----- ----- ----- --------- --------
INCOME BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 3.4 % 10.4 % 1.0% 7.3 % (17.6) (46.7)
Net income (loss) from discontinued
operations, net of minority interests (0.9) 0.6 0.2 0.6 (3.4) (3.4)
(Loss) gain on real estate from
discontinued operations, net of
minority interests (0.9) 0.6 (2.5) 0.7 (3.5) (21.7)
Cumulative effect of a change in
accounting principle 0.0 0.0 0.0 (1.2) 0.0 9.2
------ ----- ----- ----- --------- --------
NET INCOME (LOSS) 1.6 % 11.6 % (1.3)% 7.4 % (24.5) (62.6)
Series A Preferred Share distributions (2.2) (1.9) (2.1) (1.7) 0.0 (1.5)
Series B Preferred Share distributions (1.0) (0.8) (0.9) (0.4) 0.0 (3.1)
------ ----- ----- ----- --------- --------
NET (LOSS) INCOME AVAILABLE TO COMMON
SHAREHOLDERS (1.6)% 8.9 % (4.3)% 5.3 % $ (24.5) $ (67.2)
====== ===== ===== ===== ========= ========
41
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2002
PROPERTY REVENUES
Total property revenues decreased $27.2 million, or 11.4%, to $211.6
million for the three months ended September 30, 2003, as compared to $238.8
million for the three months ended September 30, 2002. The primary components of
the decrease in total property revenues are discussed below.
- Office Property revenues decreased $13.8 million, or 9.8%, to $127.0
million, primarily due to:
- a decrease of $8.0 million from the 57 consolidated Office
Properties (excluding 2002 and 2003 acquisitions and
properties held for sale) that the Company owned or had an
interest in, primarily due to a 5.4 percentage point decline
in occupancy (from 89.6% to 84.2%) resulting in decreases in
both rental revenue and operating expense recoveries;
- a decrease of $6.6 million resulting from the contribution of
two Office Properties to joint ventures in the third quarter
2002; and
- a decrease of $5.0 million related to the insurance settlement
in 2002 for tornado damage at the Carter Burgess Plaza Office
Property; partially offset by
- an increase of $2.7 million from the acquisition of the Johns
Manville Plaza Office Property in August 2002 and The
Colonnade Office Property in August 2003;
- an increase of $2.3 million in net lease termination fees to
$5.3 million for third quarter 2003; and
- an increase of $1.1 million resulting from third party
management services and related direct expense reimbursements.
- Residential Development revenues decreased $12.0 million, or 28.7%, to
$29.8 million, primarily due to:
- a decrease of $17.6 million primarily due to the sale of 19
fewer units at CRDI; partially offset by
- an increase of $3.5 million due to consolidation of MVDC and
HADC in 2003.
PROPERTY EXPENSES
Total property expenses decreased $9.6 million, or 6.7%, to $134.1
million for the three months ended September 30, 2003, as compared to $143.7
million for the three months ended September 30, 2002. The primary components of
the decrease in total property expenses are discussed below.
- Office Property expenses decreased $0.3 million, or 0.5%, to $59.5
million, primarily due to:
- a decrease of $2.6 million due to the contribution of two
Office Properties to joint ventures in 2002;
- a decrease of $0.7 million related to consulting fees incurred
in 2002 on the 5 Houston Center development and a reduction in
nonrecurring legal fees for the Office Segment; and
- a decrease of $0.4 million of other expenses; partially offset
by
- an increase of $1.3 million in operating expenses from the 57
consolidated Office Properties (excluding 2002 and 2003
acquisitions and properties held for sale) that the Company
owned or had an interest in, due to:
- $2.5 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and
- $1.7 million increase in building repairs and
maintenance expense; partially offset by
- $1.2 million decrease in bad debt expense;
- $1.0 million decrease in property taxes and other
taxes and assessments; and
- $0.7 million decrease in other expenses;
- an increase of $1.1 million from the acquisition of Johns
Manville Plaza Office Property in August 2002 and The
Colonnade Office Property in August 2003; and
- an increase of $0.9 million attributable to the cost of
providing third party management services to joint venture
properties, which are recouped by increased third party fee
income and direct expense reimbursements.
42
- Residential Development Property expenses decreased $9.6 million, or
24.4%, to $29.7 million, primarily due to:
- a decrease of $14.4 million primarily due to a reduction in
cost of sales related to the sale of 19 fewer units at CRDI;
partially offset by
- an increase of $2.6 million primarily due to increased cost of
sales from the consolidation of MVDC and HADC in 2003.
OTHER INCOME/EXPENSE
Total other income and expenses increased $5.1 million, or 7.5%, to
$73.6 million for the three months ended September 30, 2003, as compared to
$68.5 million for the three months ended September 30, 2002. The primary
components of the increase in total other expenses are discussed below.
OTHER INCOME
Other income decreased $8.2 million, or 31.4%, to $17.9 million for the
three months ended September 30, 2003, as compared to $26.1 million for the
three months ended September 30, 2002. The primary components of the decrease in
other income are discussed below.
- Gain on joint venture of properties, net decreased $17.7 million due to
a net gain of $17.7 million on the joint venture of three properties in
2002.
- Interest and other income decreased $0.5 million due to the payoff of
two notes receivable, with an aggregate principal balance of $19.9
million, in 2002.
- Equity in net income of unconsolidated companies increased $4.1
million, or 341.7%, to $5.3 million, primarily due to:
- an increase of $4.6 million in Office Properties equity in net
income primarily due to the gain on sale of three properties
at Woodlands CPC in 2003; and
- an increase of $2.2 million in Temperature-Controlled
Logistics Properties equity in income due to an increase in
rental income due to improved operations, a gain on the sale
of one facility and an improvement in real property
depreciation, interest expense and other income; partially
offset by
- a decrease of $2.5 million in Residential Development
Properties equity in net income due to a reduction in lot
sales at the Woodlands Land Development Company, L.P. and
consolidation of the operations of MVDC and HADC as a result
of the Company's purchase, on January 2, 2003, of the
remaining economic interest in DBL, which owns a majority of
the voting stock in MVDC and HADC.
- Income from investment land sales, net increased $5.9 million, due to
the gain on sale of two parcels of land, located in Texas, in 2003
compared to the sale of one parcel of land, located in Arizona, in
2002.
OTHER EXPENSES
Other expenses decreased $3.1 million, or 3.3%, to $91.6 million for
the three months ended September 30, 2003, as compared to $94.7 million for the
three months ended September 30, 2002. The primary components of the decrease in
other expenses are discussed below.
- Interest expense decreased $4.1 million, or 8.7%, to $43.0 million due
to a decrease of 0.88% in the weighted average interest rate, partially
offset by an increase of $56.0 million in the weighted average debt
balance.
- Depreciation expense increased $1.0 million, or 2.7%, to $37.7 million
primarily due to an increase in Office Property depreciation expense
primarily attributable to an increase in lease commissions and building
improvements.
INCOME TAX BENEFIT
Income tax benefit increased $2.4 million, or 96.0%, to $4.9 million
primarily due to an increase of $2.7 million attributable to Residential
Development Property operations, partially offset by a decrease of $0.5 million
from Resort/Hotel Property operations.
43
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $6.9 million, or 230.0%, to a loss of $3.9 million, primarily due to:
- a decrease of $3.4 million due to net operating losses in 2003
from seven office properties and one retail property held for
sale in 2003;
- a decrease of $2.0 million due to the impairment of three
behavioral healthcare properties in 2003; and
- a decrease of $1.4 million due to the gain on the sale of two
office properties in 2002.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
The following comparison of the results of operations for the nine
months ended September 30, 2003 and the nine months ended September 30, 2002
reflects the consolidation of eight of the Resort/Hotel Properties and three of
the Residential Development Properties commencing on February 14, 2002, as a
result of the COPI transaction. Prior to February 14, 2002, the results of
operations of the Resort/Hotel Properties were reflected in the Company's
consolidated financial statements as lease payments and as equity in net income
for the Residential Development Properties. Because the results of operations of
these Properties are consolidated for the full period in 2003, as compared to a
partial period in 2002, the Company's financial statements do not provide a
direct comparison of the results of operations of the Resort/Hotel Properties or
the Residential Development Properties for the full periods in 2003 and 2002.
Additional information on the results of operations of the Resort/Hotel
Properties or the Residential Development Properties for the full periods in
both 2003 and 2002 is provided below under the captions "Resort/Hotel
Properties" and "Residential Development Properties."
PROPERTY REVENUES
Total property revenues decreased $62.1 million, or 8.5%, to $665.5
million for the nine months ended September 30, 2003, as compared to $727.6
million for the nine months ended September 30, 2002. The components of the
decrease in total property revenues are discussed below.
- Office Property revenues decreased $35.1 million, or 8.5%, to $376.0
million, due to:
- a decrease of $24.8 million from the 57 consolidated Office
Properties (excluding 2002 and 2003 acquisitions and
properties held for sale) that the Company owned or had an
interest in, primarily due to a 5.3 percentage point decline
in occupancy (from 90.0% to 84.7%) resulting in decreases in
both rental revenue and operating expense recoveries, and
decreases in net parking revenues and charges for customary
services;
- a decrease of $22.7 million resulting from the contribution of
two Office Properties to joint ventures in the third quarter
2002;
- a decrease of $5.0 million related to the Carter Burgess
Plaza Office Property due to the insurance settlement in 2002
for tornado damage; and
- a decrease of $0.9 million in development revenue from the
construction of 5 Houston Center Office Property in 2002;
partially offset by
- an increase of $9.3 million from the acquisition of the Johns
Manville Plaza Office Property in August 2002 and The
Colonnade Office Property in August 2003;
- an increase of $3.8 million resulting from third party
management services and related direct expense reimbursements;
- an increase of $3.5 million in net lease termination fees to
$8.3 million for 2003;
- an increase of $1.3 million resulting from deferred rent
recognition for a tenant in 2003; and
- an increase of $0.5 million in other revenues.
- Residential Development Property revenues decreased $49.0 million, or
29.1%, to $119.4 million, primarily due to a reduction in lot, unit and
acreage sales at Desert Mountain and CRDI.
- Resort/Hotel Property revenues increased $22.0 million, or 14.9%, to
$170.1 million, primarily due to the consolidation of the operations of
eight of the Resort/Hotel Properties for the full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction (prior to February 14, 2002 the Company recognized lease
payments related to these properties).
44
PROPERTY EXPENSES
Total property expenses decreased $17.4 million, or 3.9%, to $427.6
million for the nine months ended September 30, 2003, as compared to $445.0
million for the nine months ended September 30, 2002. The components of the
decrease in total property expenses are discussed below.
- Office Property expenses decreased $1.5 million, or 0.8%, to $179.8
million, primarily due to:
- a decrease of $9.3 million due to the contribution of two
Office Properties to joint ventures in 2002; and
- a decrease of $1.3 million related to consulting fees incurred
in 2002 on the 5 Houston Center Office Property development
and a reduction in nonrecurring legal fees for the Office
Segment; partially offset by
- an increase of $3.7 million from the acquisition of Johns
Manville Plaza in August 2002 and The Colonnade in August
2003;
- an increase of $3.2 million related to the cost of providing
third party management services to joint venture properties,
which are recouped by increased third party fee income and
direct expense reimbursements;
- an increase of $1.4 million in operating expenses from the 57
consolidated Office Properties (excluding 2002 and 2003
acquisitions and properties held for sale) that the Company
owned or had an interest in, due to:
- $7.8 million increase in utilities expense, primarily
attributable to a new utility contract for the Texas
Office Properties; and
- $0.3 million increase in other expenses; partially
offset by
- $3.9 million decrease in property taxes;
- $1.6 million decrease in bad debt expense;
- $0.8 million decrease in building repairs,
maintenance and security expense; and
- $0.4 million decrease in management fee expenses; and
- an increase of $0.5 million in taxes/assessments related to
various land parcels.
- Resort/Hotel Property expenses increased $26.6 million, or 24.0%, to
$137.3 million, primarily due to the consolidation of the operations of
eight of the Resort/Hotel Properties for a full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction on February 14, 2002.
- Residential Development Property expenses decreased $42.5 million, or
27.8%, to $110.5 million, primarily due to a reduction in lot, unit and
acreage sales and related costs at Desert Mountain and CRDI.
OTHER INCOME/EXPENSE
Total other income and expenses increased $20.3 million, or 9.2%, to
$240.0 million for the nine months ended September 30, 2003, as compared to
$219.7 million for the nine months ended September 30, 2002. The primary
components of the increase in total other expenses are discussed below.
OTHER INCOME
Other income decreased $15.7 million, or 33.8%, to $30.8 million for
the nine months ended September 30, 2003, as compared to $46.5 million for the
nine months ended September 30, 2002. The primary components of the decrease in
other income are discussed below.
- Gain on joint venture of properties, net decreased $17.6 million
primarily due to a net gain of $17.7 million on the joint venture of
three properties in 2002.
- Equity in net income of unconsolidated companies decreased $3.9
million, or 22.4%, to $13.5 million, primarily due to:
- a decrease of $17.3 million in Residential Development
Properties equity in net income primarily due to the
consolidation of the operations of three of the Residential
Development Corporations for the full period in 2003 as
compared to a partial period in 2002 as a result of the COPI
transaction on February 14, 2002; and
- a decrease of $1.4 million in Residential Development
Properties equity in net income due to the consolidation of
the operations of MVDC and HADC as a result of the Company's
purchase, on January 2, 2003, of the remaining economic
interest in DBL, which owns a majority of the voting stock in
MVDC and HADC; partially offset by
45
- an increase of $5.1 million in Office Properties equity in net
income primarily due to the gain on sale of three properties
at Woodlands CPC in 2003;
- an increase of $3.9 million in Temperature-Controlled
Logistics Properties equity in net income due to the loss on
the sale of one facility in 2002 and the gain on the sale of
one facility in 2003, a decrease in interest expense, an
increase in rental income due to improved operations, an
increase in other income related to interest earned on
deferred rent balance and reduced general and administrative
expenses;
- an increase of $3.6 million in other unconsolidated companies
primarily due to:
- the consolidation of DBL on January 2, 2003, which
incurred a $4.8 million loss which includes a $5.2
million impairment in 2002 for Class C-1 Notes issued
by Juniper CBO 1999 Ltd., partially offset by
earnings from G2 in 2002; and
- $0.9 million of equity earnings at DBL - ABC, Inc. in
2003; partially offset by
- equity losses of $1.8 million in 2003 resulting from
operations at the Woodlands Conference Center and
Country Club in 2003.
- an increase of $2.1 million in Resort/Hotel Properties equity
in net income, primarily due to a series of transactions in
October 2002 in which the Company increased its equity
interest in the Ritz Carlton Palm Beach Hotel from 25% to 50%,
and the Company's $1.9 million portion of a payment received
from the operator of the Resort/Hotel Property pursuant to the
terms of the operating agreement because the Property did not
achieve the specified net operating income level for 2002.
- Interest and other income decreased $1.7 million, or 28.8%, to $4.2
million, primarily attributable to a decrease of $1.1 million due to
the payoff of the Temperature-Controlled Logistics Corporation's notes
receivable and a decrease of $0.8 million due to the payoff of the
Manalapan Hotel Partners' note receivable, both in 2002.
- Income from investment land sales, net increased $7.4 million, due to
net income from the sales of three parcels of land, located in Texas,
in 2003 compared to the sale of one parcel of land, located in Arizona,
in 2002.
OTHER EXPENSES
Other expenses increased $4.6 million, or 1.7%, to $270.8 million for
the nine months ended September 30, 2003, as compared to $266.2 million for the
nine months ended September 30, 2002. The primary components of the increase in
other expenses are discussed below.
- Depreciation expense increased $9.0 million, or 8.8%, to $110.9
million, primarily due to:
- an increase of $5.0 million in Residential Development
Property and Resort/Hotel Property depreciation expense; and
- an increase of $3.8 million in Office Property depreciation
expense, attributable to:
- an increase of $6.9 million due to an increase in
lease commissions, building improvements and other
leasing costs; and
- an increase of $1.3 million from Johns Manville
Office Property acquired in August 2002; partially
offset by
- a decrease of $4.4 million associated with the
contribution of two Office Properties to joint
ventures in 2002.
- Other expenses increased $1.0 million due to a loss from the sale of
marketable securities and franchise taxes related to the sale of a
property in 2002.
- Corporate, general and administrative expenses increased $0.7 million,
or 3.5%, to $20.5 million, primarily due to increased legal expenses,
shareholder services and consulting costs related to the Sarbanes-Oxley
Act.
- Interest expense decreased $6.4 million, or 4.7%, to $129.3 million due
to a decrease of 0.49% in the weighted average interest rate, partially
offset by an increase of $32.8 million in the weighted average debt
balance.
INCOME TAX BENEFIT
Income tax benefit increased $4.0 million, or 61.5%, to $10.5 million
primarily due to an increase of $9.7 million attributable to Residential
Development operations and an increase of $0.7 million attributable to
Hotel/Resort operations, partially offset by a $6.7 million deferred tax asset
recorded in 2002.
46
DISCONTINUED OPERATIONS
Income from discontinued operations on assets sold and held for sale
decreased $25.1 million, or 261.5%, to a loss of $15.5 million, due to:
- a decrease of $12.7 million, net of minority interest, due to
the impairment in 2003 on the 1800 West Loop South Office
Property;
- a decrease of $7.0 million due to the gain on the sale of four
office properties in 2002;
- a decrease of $2.9 million due to the impairment of five
behavioral healthcare properties in 2003 and one in 2002;
- a decrease of $3.5 million due to net operating losses in 2003
from seven office properties and a retail property held for
sale in 2003; and
- a decrease of $0.3 million due to the loss on sales of three
behavioral healthcare properties in 2003; partially offset by
- an increase of $1.3 million due to the impairment in 2002 of
two transportation companies sold in 2002.
RESORT/HOTEL PROPERTIES
The following provides a comparison of the results of operations of the
Resort/Hotel Properties for the nine months ended September 30, 2003 and 2002.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
(in thousands) 2003 2002 VARIANCE
- ------------------------- ---------- ----------- --------
Lease revenues $ 3,662 $ 10,128
Operating revenues 166,460 138,029
Operating expenses (137,325) (110,701)
---------- ----------- --------
Net Operating Income $ 32,797 $ 37,456 $ (4,659)
---------- ----------- --------
The net operating income for the Resort/Hotel Properties decreased $4.7
million, or 12.5%, to $32.8 million, primarily due to an increase of $4.1
million in Resort/Hotel Property expenses, primarily consisting of insurance and
workers' compensation expenses. Resort net operating income as a percentage of
revenue decreased two percentage points from 19% to 17% and Business Class Hotel
net operating income as a percentage of revenue decreased one percentage point
from 23% to 22%.
RESIDENTIAL DEVELOPMENT PROPERTIES
The following provides a comparison of the results of operations of the
Residential Development Properties for the nine months ended September 30, 2003
and 2002.
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
(in thousands) 2003 2002 VARIANCE
- ------------------------- ---------- ----------- --------
Operating revenues $ 119,380 $ 168,372
Operating expenses (110,483) (152,983)
Depreciation and amortization (7,817) (4,885)
Equity in net income of unconsolidated
Companies 4,235 22,934
Income tax benefit (provision) 6,302 (3,411)
Minority interests (1,628) (2,651)
Discontinued operations - (1,539)
---------- ----------- --------
Net Income $ 9,989 $ 25,837 $(15,848)
---------- ----------- --------
47
Net income for the Residential Development Properties decreased $15.8
million, or 61.2%, to $10.0 million, primarily due to:
- a decrease of approximately $11.3 million due to the sale of 20 fewer
lots and product mix at Desert Mountain, 175 fewer units and six fewer
equivalent time share units at CRD, and 73 fewer lots and 10 fewer
acres at The Woodlands in 2003;
- a decrease of approximately $6.0 million as a result of gains
recognized on the disposition of two properties at The Woodlands in
2002; and
- a decrease of $0.8 million due to the sale of two transportation
companies in December 2002 by CRDI; partially offset by
- an increase of $1.4 million due to a goodwill impairment at CRDI in
2002 resulting from the adoption of SFAS No. 142.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPT 30,
(in millions) 2003
- -------------------------------------- ---------------------
Cash provided by Operating Activities $ 55.6
Cash used in Investing Activities (61.5)
Cash used in Financing Activities (9.0)
--------
Decrease in Cash and Cash Equivalents $ (14.9)
Cash and Cash Equivalents, Beginning of Period 78.4
--------
Cash and Cash Equivalents, End of Period $ 63.5
========
OPERATING ACTIVITIES
The Company's cash provided by operating activities of $55.6 million is
attributable to Property operations.
INVESTING ACTIVITIES
The Company's cash used in investing activities of $61.5 million is
primarily attributable to:
- $51.1 million for revenue and non-revenue enhancing tenant
improvement and leasing costs for Office Properties;
- $28.7 million for Residential Development Property
investments;
- $18.5 million for property improvements for rental properties,
primarily attributable to non-recoverable building
improvements for the Office Properties and replacement of
furniture, fixtures and equipment for the Resort/Hotel
Properties;
- $14.8 million for the acquisition of rental properties;
- $4.8 million of additional investment in unconsolidated
Residential Development Properties;
- $3.6 million for development of investment properties;
- $1.4 million of additional investment in SunTx;
- $0.9 million of additional investment in
Temperature-Controlled Logistics Properties; and
- $0.8 million resulting from an increase in restricted cash,
due primarily to an increase in escrow deposits for capital
expenditures at the Company's Office Properties.
The cash used in investing activities is partially offset by:
- $19.1 million resulting from a decrease in notes receivable,
primarily due to payment on a short-term seller financing note
attributable to the sale of two Office Properties in The
Woodlands and collections on developer financing notes at the
Residential Development Properties related to lot and unit
sales in 2002;
- $16.0 million of proceeds from property sales;
- $11.4 million in cash resulting from the consolidation of MVDC
and HADC;
- $7.7 million from return of investments in unconsolidated
Office Properties;
- $5.4 million from return of investments in SunTx;
- $3.2 million from return of investments in
Temperature-Controlled Logistics Properties; and
48
- $0.2 million from return of investments in unconsolidated
Residential Development Properties.
FINANCING ACTIVITIES
The Company's cash used in financing activities of $9.0 million is
attributable to:
- $134.0 million of payments under the Company's credit
facility, primarily from proceeds from the new Cigna note;
- $131.6 million of distributions to common shareholders and
unitholders;
- $97.2 million of payments under other borrowings, partially
resulting from the payoff of the Cigna Note;
- $56.0 million of Residential Development Property note
payments;
- $19.7 million of distributions to preferred shareholders;
- $9.5 million of net capital distributions to joint venture
partners;
- $2.6 million of debt financing costs; and
- $0.9 million for common shares purchased under a compensation
plan.
The cash used in financing activities is partially offset by:
- $284.5 million of proceeds from borrowings under the Company's
credit facility, a portion of which were used to pay off the
Cigna Note and for investment in Residential Development
Properties and tenant improvements, leasehold commissions and
property improvements for the Office Segment;
- $100.5 million of proceeds from other borrowings, primarily as
a result of the new Cigna note; and
- $57.5 million of proceeds from borrowings for construction
costs for infrastructure development on Residential
Development Properties.
LIQUIDITY REQUIREMENTS
DEBT FINANCING SUMMARY
The following tables show summary information about the Company's debt,
including its share of unconsolidated debt, as of September 30, 2003. Additional
information about the significant terms of the Company's debt financing
arrangements, its unconsolidated debt, and the Company's guarantees of
unconsolidated debt, is contained in Note 9, "Notes Payable and Borrowings under
Credit Facility," Note 8, "Investments in Unconsolidated Companies," and Note
11, "Commitments and Contingencies" of Item 1, "Financial Statements."
SHARE OF
TOTAL UNCONSOLIDATED
(in thousands) COMPANY DEBT(1) DEBT(2) TOTAL(3)
- ----------------- --------------- -------------- -----------
Fixed Rate Debt $ 1,677,547 $ 323,767 $ 2,001,314
Variable Rate Debt 898,922 236,349 1,135,271
----------- --------- -----------
Total Debt $ 2,576,469 $ 560,116 $ 3,136,585
=========== ========= ===========
- -----------------
(1) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $500.0 million of hedged variable rate debt, are
85% and 15%, respectively.
(2) Balance excludes hedges. The percentages for fixed rate debt and variable
rate debt, including the $42.5 million of hedged variable rate debt, are 65%
and 35%, respectively.
(3) Balance excludes hedges. The percentages for total consolidated and
unconsolidated fixed rate debt and variable rate debt, including the $542.5
million of hedged variable rate debt, are 81% and 19%, respectively.
49
Listed below are the aggregate principal payments by year required as
of September 30, 2003. Scheduled principal installments and amounts due at
maturity are included.
UNSECURED
DEBT TOTAL SHARE OF
SECURED UNSECURED LINE OF COMPANY UNCONSOLIDATED
(in thousands) DEBT DEBT CREDIT DEBT DEBT TOTAL
- ------------- ------------ --------- --------- ----------- -------------- -----------
2003 $ 17,643 $ 7,000 $ - $ 24,643 $ 12,027 $ 36,670
2004 285,554 - 314,500 600,054 86,910 686,964
2005 381,903 - - 381,903 162,286 544,189
2006 18,920 - - 18,920 23,977 42,897
2007 26,892 250,000 - 276,892 48,384 325,276
Thereafter 899,057 375,000 - 1,274,057 226,532 1,500,589
------------ --------- --------- ----------- --------- -----------
$ 1,629,969 $ 632,000 $ 314,500 $ 2,576,469 $ 560,116 $ 3,136,585
============ ========= ========= =========== ========= ===========
CAPITAL EXPENDITURES
As of September 30, 2003, the Company had unfunded capital expenditures
of approximately $56.4 million relating to capital investments that are not in
the ordinary course of operations of the Company's business segments. The table
below specifies the Company's requirements for capital expenditures and its
amounts funded as of September 30, 2003, and amounts remaining to be funded
(future fundings classified between short-term and long-term capital
requirements):
CAPITAL EXPENDITURES
---------------------------
TOTAL AMOUNT FUNDED AMOUNT SHORT-TERM
PROJECT AS OF SEPT REMAINING TO (NEXT 12 LONG-TERM
(in millions) PROJECT COST (1) 30, 2003 FUND MONTHS) (2) (12+ MONTHS) (2)
- --------------------------------------- -------- ------------- ------------ ----------- ----------------
OFFICE SEGMENT
Acquired or Developed Properties (3) $ 2.2 $ (1.5) $ 0.7 $ 0.7 $ -
Houston Center Shops Redevelopment (4) 11.6 (2.7) 8.9 8.9 -
RESIDENTIAL DEVELOPMENT SEGMENT (5)
Tahoe Mountain Properties & Club 85.3 (78.9) 6.4 6.4 -
Desert Mountain Golf Course and
Water Supply Pipeline 55.9 (46.3) 9.6 9.6 -
RESORT/HOTEL SEGMENT
Canyon Ranch - Tucson Land -
Construction Loan (6) 3.2 - 3.2 1.6 1.6
OTHER
SunTx (7) 19.0 (6.9) 12.1 4.0 8.1
Crescent Spinco (8) 15.5 - 15.5 15.5 -
-------- -------- -------- -------- --------
TOTAL $ 192.7 $ (136.3) $ 56.4 $ 46.7 $ 9.7
======== ======== ======== ======== ========
- -----------------
(1) All amounts are approximate.
(2) Reflects the Company's estimate of the breakdown between short-term and
long-term capital expenditures.
(3) The capital expenditures reflect the Company's ownership percentage in
each Property, 25% for 5 Houston Center Office Property and 30% for Five
Post Oak Park Office Property.
(4) Located within the Houston Center Office Property complex.
(5) Represents capital expenditures for infrastructure and amenities. The
Tahoe Mountain Properties and Club project costs exclude costs for
projects in which the Company anticipates sales to occur over the next 18
months.
(6) The Company committed to fund a construction loan to the purchaser of the
land which will be secured by 20 developed lots and a $0.6 million letter
of credit.
(7) This commitment is related to the Company's investment in a private equity
fund.
(8) The Company expects to form and capitalize Crescent Spinco, which will be
a separate entity to be owned by the Company's shareholders and
unitholders, and to cause the new entity to commit to acquire COPI's
entire membership interest in AmeriCold Logistics.
LIQUIDITY OUTLOOK
The Company expects to fund its short-term capital requirements of
approximately $46.7 million through a combination of construction financing, net
cash flow from operations, and borrowings under the Company's credit facility or
additional debt facilities. The Company plans to meet its maturing debt
obligations, through September 30, 2004, of approximately $611.3 million,
primarily through electing the extension option on its Credit Facility,
refinancing or electing
50
the extension option on the Deutsche Bank-CMBS loan, and extending the maturity
date of the Northwestern Life Note pursuant to the terms of an existing
commitment.
The Company expects to meet its other short-term liquidity
requirements, consisting of normal recurring operating expenses, debt service
requirements, non-revenue enhancing capital expenditures and revenue enhancing
capital expenditures (such as property improvements, tenant improvements and
leasing costs), distributions to shareholders and unitholders, and unfunded
expenses related to the COPI bankruptcy, primarily through cash flow provided by
operating activities and return of capital from the Residential Development
Segment. The Company expects to fund the remainder of these short-term liquidity
requirements with borrowings under the Company's credit facility and additional
debt facilities, and proceeds from the sale or joint venture of Properties.
The Company's long-term liquidity requirements as of September 30, 2003
consist primarily of debt maturities after September 30, 2004, which totaled
approximately $2.0 billion. The Company also has $9.7 million of long-term
capital expenditure requirements. The Company expects to meet these long-term
liquidity requirements primarily through long-term secured and unsecured
borrowings and other debt and equity financing alternatives as well as cash
proceeds received from the sale or joint venture of Properties and return of
capital investment from the Residential Development Segment.
Debt and equity financing alternatives currently available to the
Company to satisfy its liquidity requirements and commitments for material
capital expenditures include:
- Additional proceeds from the Company's Credit Facility under which the
Company has up to $53.9 million of borrowing capacity available as of
September 30, 2003;
- Additional proceeds from the refinancing of existing secured and
unsecured debt;
- Additional debt secured by existing underleveraged properties;
- Issuance of additional unsecured debt;
- Equity offerings including preferred and/or convertible securities; and
- Proceeds from joint ventures and Property sales.
The following factors could limit the Company's ability to utilize
these financing alternatives:
- The reduction in the operating results of the Properties supporting the
Company's Credit Facility to a level that would reduce the availability
under the Credit Facility;
- A reduction in the operating results of the Properties could limit the
Company's ability to refinance existing secured and unsecured debt;
- The Company may be unable to obtain debt or equity financing on
favorable terms, or at all, as a result of the financial condition of
the Company or market conditions at the time the Company seeks
additional financing;
- Restrictions under the Company's debt instruments or outstanding equity
may prohibit it from incurring debt or issuing equity on terms
available under then-prevailing market conditions or at all; and
- The Company may be unable to service additional or replacement debt due
to increases in interest rates or a decline in the Company's operating
performance.
The Company's portion of unconsolidated debt maturing through September
30, 2004 is $30.3 million. The Company's portion of unconsolidated debt maturing
after September 30, 2004 is $529.8 million. Unconsolidated debt is the liability
of the unconsolidated entity, is typically secured by that entity's property,
and is non-recourse to the Company except where a guarantee exists.
51
DEBT FINANCING
DEBT FINANCING ARRANGEMENTS
The significant terms of the Company's primary debt financing
arrangements existing as of September 30, 2003, are shown below:
BALANCE INTEREST
OUTSTANDING RATE AT
MAXIMUM AT SEPT 30, SEPT 30, MATURITY
DESCRIPTION (1) BORROWINGS 2003 2003 DATE
- ---------------------------------------- ----------- ----------- ------------- -------------
SECURED FIXED RATE DEBT: (dollars in thousands)
AEGON Partnership Note $ 261,412 $ 261,412 7.53 % July 2009
LaSalle Note I 235,829 235,829 7.83 August 2027
JP Morgan Mortgage Note 192,395 192,395 8.31 October 2016
LaSalle Note II 160,072 160,072 7.79 March 2028
Cigna Note 70,000 70,000 5.22 June 2010
Bank of America Note 38,000 38,000 5.53 May 2013
Metropolitan Life Note V 37,667 37,667 8.49 December 2005
Northwestern Life Note 26,000 26,000 7.66 January 2004
Woodmen of the World Note 8,500 8,500 8.20 April 2009
Nomura Funding VI Note 7,898 7,898 10.07 July 2020
Mitchell Mortgage Note 1,743 1,743 7.00 December 2003
Construction, Acquisition and other
obligations for various CRDI and
MVDC projects 13,031 13,031 2.90 to 11.25 Jan 04 to May 08
----------- ----------- -------------
Subtotal/Weighted Average $ 1,052,547 $ 1,052,547 7.59 %
----------- ----------- -------------
UNSECURED FIXED RATE DEBT:
The 2009 Notes $ 375,000 $ 375,000 9.25 % April 2009
The 2007 Notes 250,000 250,000 7.50 September 2007
----------- ----------- -------------
Subtotal/Weighted Average $ 625,000 $ 625,000 8.55 %
----------- ----------- -------------
SECURED VARIABLE RATE DEBT:
Fleet Fund I and II Term Loan $ 275,000 $ 275,000 4.38 % May 2005
Deutsche Bank-CMBS Loan (2) 220,000 220,000 5.84 May 2004
National Bank of Arizona 51,825 49,191 4.00 to 5.00 Nov 04 to Dec 05
FHI Finance Loan 10,000 435 5.62 September 2009
Construction, Acquisition and other
obligations for various CRDI and
MVDC projects 74,862 32,796 4.00 to 5.00 Oct 03 to Sept 08
----------- ----------- -------------
Subtotal/Weighted Average $ 631,687 $ 577,422 4.87 %
----------- ----------- -------------
UNSECURED VARIABLE RATE DEBT:
Credit Facility (3) $ 383,570 $ 314,500 (4) 3.00 % May 2004
JP Morgan Loan Sales Facility (5) 50,000 7,000 2.50 -
----------- ----------- -------------
Subtotal/Weighted Average $ 433,570 $ 321,500 2.99 %
----------- ----------- -------------
TOTAL/WEIGHTED AVERAGE $ 2,742,804 $ 2,576,469 6.65 %(6)
=========== =========== =============
AVERAGE REMAINING TERM 6.9 years
- --------------------------------
(1) For more information regarding the terms of the Company's debt financing
arrangements, including the amounts payable at maturity, properties
securing the Company's secured debt and the method of calculation of the
interest rate for the Company's variable rate debt, see Note 9, "Notes
Payable and Borrowings under the Credit Facility," included in Item 1,
"Financial Statements."
(2) This loan has two one-year extension options.
(3) This facility has a one-year extension option.
(4) The outstanding balance excludes letters of credit issued under the credit
facility of $15.2 million.
(5) This is an uncommitted facility.
(6) The overall weighted average interest rate does not include the effect of
the Company's cash flow hedge agreements. Including the effect of these
agreements, the overall weighted average interest rate would have been
6.73%.
52
In April 2003, the Company obtained modifications to certain
definitions relating to financial and other covenants in the $400 million Fleet
Revolving Credit Facility and $275 million Fleet Fund I and II Term Loan. The
modifications did not alter the Company's borrowing capacity, scheduled
principal payments, interest rates, or maturity dates.
In October 2003, the Company received approval from the lending group
for the Fleet Revolving Credit Facility and $275 million Fleet Funding I and II
Term Loan for less restrictive key financial and other covenants in each
facility. The Company requested these modifications due to the slowdown in the
general business environment and its impact on the Company's core business cash
flow. In exchange for approving the modifications, the Company agreed to an
increase in the interest rate spread over LIBOR by 25 basis points
(approximately $1.6 million interest expense based on maximum borrowings) for
both the Credit Facility and the Term Loan.
The Company is currently negotiating the terms of a $75 million
secured loan with Fleet Bank. The loan is expected to have a term of 120 days
and close prior to November 14, 2003. The Company expects to refinance the loan
with a $75 million term loan secured by an Office Property.
As of September 30, 2003, no event of default had occurred, and the
Company was in compliance with all of its financial covenants related to its
outstanding debt.
The Company is generally obligated by its debt agreements to comply
with financial covenants, affirmative covenants and negative covenants, or some
combination of these types of covenants. Failure to comply with covenants under
the Credit Facility or other debt instruments could result in an event of
default under one or more of the Company's debt instruments. Any uncured or
unwaived events of default under the Company's loans can trigger an increase in
interest rates, an acceleration of payment on the loan in default or, for the
Company's secured debt, foreclosure on the Property securing the debt, and could
cause the credit facility to become unavailable to the Company. In addition, an
event of default by the Company or any of its subsidiaries with respect to any
indebtedness in excess of $5.0 million generally will result in an event of
default under the credit facility and the Fleet Fund I and II Term Loan after
the notice and cure periods for the other indebtedness have passed. As a result,
any uncured or unwaived event of default could have an adverse effect on the
Company's business, financial condition, or liquidity.
The Company's debt facilities generally prohibit loan prepayment for an
initial period, allow prepayment with a penalty during a following specified
period and allow prepayment without penalty after the expiration of that period.
During the nine months ended September 30, 2003, there were no circumstances
that required prepayment or increased collateral related to the Company's
existing debt.
The Company's policy with regard to the incurrence and maintenance of
debt is based on a review and analysis of the following:
- investment opportunities for which capital is required and the
cost of debt in relation to such investment opportunities;
- the type of debt available (secured or unsecured; variable or
fixed);
- the effect of additional debt on existing covenant ratios;
- the maturity of the proposed debt in relation to maturities of
existing debt; and
- exposure to variable rate debt and alternatives such as
interest-rate swaps and cash flow hedges to reduce this
exposure.
UNCONSOLIDATED DEBT ARRANGEMENTS
As of September 30, 2003, the total debt of the unconsolidated joint
ventures and equity investments in which the company has ownership interests was
$1.4 billion, of which the Company's share was $560.1 million. The Company had
guaranteed $12.6 million of this debt as of September 30, 2003. Additional
information relating to the Company's unconsolidated debt financing arrangements
is contained in Note 8, "Investments in Unconsolidated Companies," of Item 1,
"Financial Statements."
Under the terms of the Main Street Partners, L.P., ("Main Street
Partners") loan agreement, the Bank One Center Office Property must maintain
certain coverage ratios in order for Main Street Partners to distribute cash. As
of September 30, 2003, the Property income was not sufficient to provide the
minimum required coverages. While this does not constitute a default under the
loan agreement, Main Street Partners will not be permitted to distribute cash
during the period during which minimum required coverages are not maintained.
53
GUARANTEE COMMITMENTS
The Company's guarantees in place as of September 30, 2003 are listed
in the table below. For the guarantees on indebtedness, no triggering events or
conditions are anticipated to occur that would require payment under the
guarantees and management believes the assets associated with the loans that are
guaranteed are sufficient to cover the maximum potential amount of future
payments and therefore, would not require the Company to provide additional
collateral to support the guarantees.
GUARANTEED
AMOUNT MAXIMUM
OUTSTANDING GUARANTEED
AT SEPT 30, 2003 AMOUNT
DEBTOR ------------------ ----------
- --------------------------------------------------------------- (in thousands)
CRDI - Eagle Ranch Metropolitan District - Letter of Credit (1) $ 15,197 $ 15,197
Blue River Land Company, L.L.C.(2)(3) 5,355 6,300
Main Street Partners, L.P. - Letter of Credit (2)(4) 4,250 4,250
Manalapan Hotel Partners, L.L.C. - Letter of Credit (2)(5) 3,000 3,000
----------- ---------
Total Guarantees $ 27,802 $ 28,747
=========== =========
- ------------------------------
(1) The Company provides a $15.2 million letter of credit to support the
payment of interest and principal of the Eagle Ranch Metropolitan District
Revenue Development Bonds and Limited Tax Bonds.
(2) See Note 8, "Investments in Unconsolidated Companies - Unconsolidated Debt
Analysis," in Item 1, "Financial Statements," for a description of the
terms of this debt.
(3) A fully consolidated entity of CRDI, of which CRDI owns 88.3%, provides a
guarantee of 70% of the outstanding balance of up to a $9.0 million loan to
Blue River Land Company, L.L.C. There was approximately $7.7 million
outstanding at September 30, 2003 and the amount guaranteed was $5.4
million.
(4) The Company and its joint venture partner each provide a $4.3 million
letter of credit to guarantee repayment of up to $8.5 million of the loan
to Main Street Partners, L.P.
(5) The Company and its joint venture partner each provide a $3.0 million
letter of credit to guarantee repayment of up to $6.0 million of the
Manalapan debt with Corus Bank.
OTHER COMMITMENTS
On September 23, 2003, the Company entered into a one year option
agreement for the future sale of approximately 1.5 acres of undeveloped
investment land located in Houston, Texas for approximately $7.8 million. The
Company received $0.01 million consideration in September 2003. The option
agreement may be extended up to four years on a yearly basis at the option of
the prospective purchaser for additional consideration.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's objective in using derivatives is to add stability to
interest expense and to manage its exposure to interest rate movements or other
identified risks. Derivative financial instruments are used to convert a portion
of the Company's variable rate debt to fixed rate debt and to manage its fixed
to variable rate debt ratio. To accomplish this objective, the Company primarily
uses interest rate swaps as part of its cash flow hedging strategy. Interest
rate swaps designated as cash flow hedges involve the payment of fixed rate
amounts in exchange for variable rate payments over the life of the agreements
without exchange of the underlying principal amount. For the nine months ended
September 30, 2003, such derivatives were used to hedge the variable cash flows
associated with existing variable rate debt.
54
The following table shows information regarding the Company's cash flow
hedge agreements during the nine months ended September 30, 2003, and additional
interest expense and unrealized gains (losses) recorded in Accumulated Other
Comprehensive Income ("OCI").
CHANGE IN
NOTIONAL MATURITY REFERENCE FAIR MARKET ADDITIONAL UNREALIZED GAINS
EFFECTIVE DATE AMOUNT DATE RATE VALUE INTEREST EXPENSE (LOSSES) IN OCI
- -------------- -------- -------- --------- ----------- ---------------- ----------------
(in thousands)
- --------------
9/01/99 $ 200,000 9/02/03 6.18% $ - $ 6,562 $ 6,506
5/15/01 200,000 2/03/03 7.11% - 1,048 1,057
4/18/00 100,000 4/18/04 6.76% (3,346) 4,179 3,738
2/15/03 100,000 2/15/06 3.26% (3,280) 1,286 (752)
2/15/03 100,000 2/15/06 3.25% (3,273) 1,285 (754)
9/02/03 200,000 9/01/06 3.72% (9,094) 419 (3,976)
----------- ----------- ----------
$ (18,993) $ 14,779 $ 5,819
=========== =========== ==========
CRDI, a consolidated subsidiary of the Company, also uses derivative
financial instruments to convert a portion of its variable rate debt to fixed
rate debt.
The following table shows information regarding CRDI's cash flow hedge
agreements and additional capitalized interest during the nine months ended
September 30, 2003. Unlike the additional interest on the Company's cash flow
hedges, which was expensed, the additional interest on CRDI's cash flow hedges
was capitalized, as it is related to debt incurred for projects that are
currently under development. Also presented are the unrealized gains in OCI for
the nine months ended September 30, 2003.
ADDITIONAL CHANGE IN
ISSUE NOTIONAL MATURITY REFERENCE FAIR MARKET CAPITALIZED UNREALIZED
DATE AMOUNT DATE RATE VALUE INTEREST GAINS IN OCI
- -------------- -------- -------- --------- ----------- ----------- ------------
(in thousands)
- --------------
9/4/01 $ 4,650 9/4/03 4.12% $ - $ 91 $ 101
9/4/01 3,700 9/4/03 4.12% - 72 79
----- ------- -----
$ - $ 163 $ 180
===== ======= =====
In June 2003, CRDI entered into an interest rate cap agreement with
Bank of America with an initial notional amount of $0.8 million, increasing
monthly to up to $28.3 million in September 2004, based on the amount of the
loan. The agreement limits the interest rate on the notional amount to a maximum
prime rate, as defined in the agreement, of 4.1%.
RECENT DEVELOPMENTS
ASSET ACQUISITIONS
OFFICE PROPERTIES
On August 26, 2003, the Company acquired The Colonnade, an 11-story,
216,000 square foot Class A office tower, located in the Coral Gables submarket
of Miami, Florida. The Company acquired the Office Property for approximately
$51.4 million, funded by the Company's assumption of a $38 million loan from
Bank of America and a draw on the Company's credit facility. The Office Property
is wholly-owned and included in the Company's Office Segment.
RESIDENTIAL DEVELOPMENT PROPERTIES
On August 14, 2003, CRDI, a consolidated subsidiary of the Company,
completed the purchase of a tract of undeveloped land in Eagle County, Colorado
for approximately $15.5 million, funded by a draw on the Company's credit
facility.
JOINT VENTURES
On October 8, 2003, the Company entered into a joint venture, Crescent
One Briar Lake L.P., with affiliates of J.P. Morgan Fleming Asset Management,
Inc. The joint venture purchased One Briar Lake Plaza, located in the Westchase
submarket of Houston, Texas, for approximately $74.4 million. The Property is a
20 story, 502,000 square foot
55
Class A office building. The affiliates of J.P. Morgan Fleming Asset Management,
Inc. own a 70% interest, and the Company owns a 30% interest, in the joint
venture. The initial cash equity contribution to the joint venture was $24.4
million, of which the Company's portion was $7.3 million. The Company's equity
contribution and an additional working capital contribution of $0.5 million were
funded primarily through a draw under the Company's credit facility. The
remainder of the purchase price of the Property was funded by a secured loan to
the joint venture in the amount of $50.0 million. None of the mortgage financing
at the joint venture level is guaranteed by the Company. The Company manages and
leases the Office Property on a fee basis. The Office Property is an
unconsolidated investment and will be included in the Company's Office Segment.
ASSETS HELD FOR SALE AND ASSET DISPOSITIONS
OFFICE SEGMENT
As of September 30, 2003, the 1800 West Loop South Office Property
located in the West Loop/Galleria submarket in Houston, Texas was held for sale.
During the first quarter of 2003, the Company recognized an approximately $12.7
million impairment charge, net of minority interests, on the 1800 West Loop
South Office Property.
In addition, as of September 30, 2003, the Las Colinas Plaza retail
property, located in the Las Colinas submarket in Dallas, Texas, the Liberty
Plaza Office Property located in the Far North Dallas submarket in Dallas,
Texas, the 12404 Park Central Office Property located in the LBJ Freeway
submarket in Dallas, Texas and the four Woodlands Office Properties located in
The Woodlands submarket in Houston, Texas were held for sale.
In October 2003, the Las Colinas Plaza and 1800 West Loop South Office
Properties were under contract for sale. The sales are anticipated to close in
December 2003.
RESORT/HOTEL SEGMENT
In October 2003, Manalapan entered into a contract to sell the Ritz
Carlton Palm Beach Resort/Hotel Property. The sale is anticipated to close in
November 2003. The Company's equity interest in Manalapan is 50%.
BEHAVIORAL HEALTHCARE PROPERTIES
On February 27, 2003, the Company sold a behavioral healthcare property
for $2.0 million, consisting of $1.3 million in cash and a $0.7 million note
receivable. The Company recognized a loss on the sale of this property of
approximately $0.3 million. A $2.3 million impairment charge, net of minority
interest, had been recognized during 2002 related to this property.
On May 2, 2003, the Company sold a behavioral healthcare property for
$2.1 million. The Company recognized a loss on the sale of this property of
approximately $0.1 million. A $0.7 million impairment charge, net of minority
interest, was recognized during the first quarter of 2003 related to this
property.
On July 10, 2003, the Company sold a behavioral healthcare property for
$2.3 million and recognized a minimal gain on the sale. A $0.8 million
impairment charge, net of minority interest, was recognized during the second
quarter of 2003 related to this property.
As of September 30, 2003, the Company owned four behavioral healthcare
properties. Impairment charges of approximately $2.0 million, net of minority
interests, were recognized during the third quarter related to three of these
four remaining properties. Two of these properties were sold on October 15,
2003.
INVESTMENT LAND DISPOSITIONS
On April 24, 2003, the Company completed the sale of approximately
one-half acre of undeveloped land located in Dallas, Texas. The sale generated
net proceeds and a net gain of approximately $0.3 million. This land was
wholly-owned by the Company.
On May 15, 2003, the Company completed the sale of approximately 24.8
acres of undeveloped land located in Coppell, Texas. The sale generated net
proceeds of $3.0 million and a net gain of approximately $1.1 million. This land
was wholly-owned by the Company.
56
On June 27, 2003, the Company sold approximately 3.5 acres of
undeveloped land located in Houston, Texas. The sale generated proceeds of $2.1
million, net of closing costs, and a note receivable in the amount of $11.8
million, with annual installments of principal and interest payments beginning
June 27, 2004, through maturity on June 27, 2010. The principal payment amounts
are calculated based upon a 20-year amortization and the interest rate is 4% for
the first two years and thereafter the prime rate, as defined in the note,
through maturity. Due to a modification of the sales agreement after June 30,
2003, the Company recognized a net gain on the sale of this land of
approximately $8.9 million in the third quarter of 2003. This land was
wholly-owned by the Company.
On September 30, 2003, the Company completed the sale of approximately
3.1 acres of undeveloped land located in the Greenway Plaza office complex of
Houston, Texas. The sale generated net proceeds of approximately $5.3 million
and a net gain of approximately $2.4 million. This land was wholly-owned by the
Company.
RELATED PARTY TRANSACTIONS
DBL HOLDINGS, INC.
Since June 1999, the Company contributed approximately $23.8 million to
DBL. The contribution was used by DBL to make an equity contribution to DBL-ABC,
Inc., which committed to purchase a limited partnership interest representing a
12.5% interest in G2. G2 was formed for the purpose of investing in commercial
mortgage backed securities and other commercial real estate investments and is
managed and controlled by an entity that is owned equally by GMSP and GMACCM.
The G2 general partner is entitled to an annual asset management fee. The
ownership structure of GMSP consists of an approximately 86% limited partnership
interest owned directly and indirectly by Richard E. Rainwater, Chairman of the
Board of Trust Managers of the Company, and an approximately 14% general
partnership interest, of which approximately 6% is owned by Darla Moore, who is
married to Mr. Rainwater, and approximately 6% is owned by John C. Goff,
Vice-Chairman of the Company's Board of Trust Managers and Chief Executive
Officer of the Company. The remaining approximately 2% general partnership
interest is owned by parties unrelated to the Company. At September 30, 2003,
DBL had an approximately $13.4 million investment in G2.
On January 2, 2003, the Company purchased the remaining 2.56% economic
interest, representing 100% of the voting stock, in DBL from Mr. Goff. Total
consideration paid for Mr. Goff's interest was $0.4 million. The Board of Trust
Managers of the Company, including all the independent trust managers, approved
the transaction based in part on an appraisal of the assets of DBL by an
independent appraisal firm. As a result of this transaction, DBL is wholly-owned
by the Company and is consolidated in the Residential Development Segment as of
and for the nine months ended September 30, 2003. Also, because DBL owns a
majority of the voting stock in MVDC and HADC, the Company has consolidated
these two Residential Development Corporations as of and for the nine months
ended September 30, 2003.
UNCONSOLIDATED INVESTMENTS
INVESTMENTS IN UNCONSOLIDATED COMPANIES
The Company has investments of 20% to 50% in seven unconsolidated joint
ventures that own seven Office Properties. These investments are accounted for
using the equity method of accounting.
The Company, through ownership interests of 50% or less, or ownership
of non-voting interests only, has other unconsolidated investments. These
investments are accounted for using the equity method of accounting.
See "Recent Developments - Joint Ventures" for information regarding an
unconsolidated joint venture arrangement entered into subsequent to September
30, 2003.
57
The following is a summary of the Company's ownership in significant
unconsolidated joint ventures and investments as of September 30, 2003.
COMPANY'S OWNERSHIP
ENTITY CLASSIFICATION AS OF SEPTEMBER 30, 2003
- ------------------------------------------------- ----------------------------------- ------------------------
Main Street Partners, L.P. Office (Bank One Center-Dallas) 50.0% (1)
Crescent Miami Center, L.L.C. Office (Miami Center - Miami) 40.0% (2)
Crescent 5 Houston Center, L.P. Office (5 Houston Center-Houston) 25.0% (3)
Austin PT BK One Tower Office Limited Partnership Office (Bank One Tower-Austin) 20.0% (4)
Houston PT Four Westlake Park Office Limited
Partnership Office (Four Westlake Park-Houston) 20.0% (4)
Houston PT Three Westlake Park Office Limited
Partnership Office (Three Westlake Park - Houston) 20.0% (4)
Crescent Five Post Oak Park L.P. Office (Five Post Oak - Houston) 30.0% (5)
The Woodlands Commercial Properties Company, L.P. Office 42.5% (6)(7)
The Woodlands Land Development Company, L.P. Residential Development 42.5% (6)(7)
Blue River Land Company, L.L.C. Residential Development 50.0% (8)
EW Deer Valley, L.L.C. Residential Development 41.7% (9)
Manalapan Hotel Partners, L.L.C. Resort/Hotel (Ritz Carlton Palm Beach) 50.0% (10)
Vornado Crescent Portland Partnership Temperature-Controlled Logistics 40.0% (11)
Vornado Crescent Carthage and KC Quarry, L.L.C. Temperature-Controlled Logistics 56.0% (12)
CR License, L.L.C. Other 30.0% (13)
The Woodlands Operating Company, L.P. Other 42.5% (6)(7)
Canyon Ranch Las Vegas, L.L.C. Other 65.0% (14)
SunTx Fulcrum Fund, L.P. Other 28.1% (15)
G2 Opportunity Fund, L.P. Other 12.5% (16)
- --------------------------
(1) The remaining 50% interest in Main Street Partners, L.P. is owned by Trizec
Properties, Inc.
(2) The remaining 60% interest in Crescent Miami Center, L.L.C. is owned by an
affiliate of a fund managed by JP Morgan Fleming Asset Management, Inc.
(3) The remaining 75% interest in Crescent 5 Houston Center, L.P. is owned by a
pension fund advised by JP Morgan Fleming Asset Management, Inc.
(4) The remaining 80% interest in each of Austin PT BK One Tower Office Limited
Partnership, Houston PT Three Westlake Park Office Limited Partnership and
Houston PT Four Westlake Park Office Limited Partnership is owned by an
affiliate of General Electric Pension Trust.
(5) The remaining 70% interest in Crescent Five Post Oak Park L.P. is owned by
an affiliate of General Electric Pension Trust.
(6) The remaining 57.5% interest in each of the WLDC, Woodlands CPC and The
Woodlands Operating Company, L.P. is owned by an affiliate of Morgan
Stanley.
(7) Distributions are made to partners based on specified payout percentages.
During the nine months ended September 30, 2003, the payout percentage to
the Company was 52.5%.
(8) The remaining 50% interest in Blue River Land Company, L.L.C. is owned by
parties unrelated to the Company.
(9) The remaining 58.3% interest in EW Deer Valley, L.L.C. is owned by parties
unrelated to the Company.
(10) The remaining 50% interest in Manalapan is owned by WB Palm Beach
Investors, L.L.C. In October 2003, Manalapan entered into a contract to
sell the Ritz Carlton Palm Beach Resort/Hotel Property. The sale is
anticipated to close in November 2003. The Company's equity interest in
Manalapan is 50%.
(11) The remaining 60% interest in Vornado Crescent Portland Partnership is
owned by Vornado Realty Trust, L.P.
(12) The remaining 44% in Vornado Crescent Carthage and KC Quarry, L.L.C. is
owned by Vornado Realty Trust, L.P.
(13) The remaining 70% interest in CR License, L.L.C. is owned by an affiliate
of the management company of two of the Company's Resort/Hotel Properties.
(14) The remaining 35% interest in Canyon Ranch Las Vegas, L.L.C. is owned by an
affiliate of the management company of two of the Company's Resort/Hotel
Properties.
(15) SunTx's objective is to invest in a portfolio of acquisitions that offer
the potential for substantial capital appreciation. The remaining 71.9% of
SunTx is owned by a group of individuals unrelated to the Company. The
Company's ownership percentage will decline by the closing date of SunTx as
capital commitments from third parties are secured. The Company's projected
ownership interest at the closing of SunTx is approximately 7.5% based on
SunTx manager's expectations for the final SunTx capitalization. The
Company accounts for its investment in SunTx under the cost method. The
Company's investment at September 30, 2003 was $6.9 million.
(16) G2 was formed for the purpose of investing in commercial mortgage backed
securities and other commercial real estate investments. GMSP and GMACCM
each own 21.875% of G2, with the remaining 43.75% owned by parties
unrelated to the Company. See Note 15, "Related Party Transactions," in
Item 1, "Financial Statements," for information regarding the ownership
interests of trust managers and officers of the Company in GMSP.
TEMPERATURE-CONTROLLED LOGISTICS SEGMENT
As of September 30, 2003, the Company held a 40% interest in the
Temperature-Controlled Logistics Partnership, which owns the
Temperature-Controlled Logistics Corporation, which directly or indirectly owns
the 87 Temperature-Controlled Logistics Properties, with an aggregate of
approximately 440.7 million cubic feet (17.5 million square feet) of warehouse
space.
58
The Temperature-Controlled Logistics Corporation leases the
Temperature-Controlled Logistics Properties to AmeriCold Logistics, a limited
liability company owned 60% by Vornado Operating L.P. and 40% by a subsidiary of
COPI. The Company has no economic interest in AmeriCold Logistics. See Note 16,
"COPI," in Item 1, "Financial Statements," for information on the proposed
acquisition of COPI's 40% interest in AmeriCold Logistics by a new entity to be
owned by the Company's shareholders.
AmeriCold Logistics, as sole lessee of the Temperature-Controlled
Logistics Properties, leases the Temperature-Controlled Logistics Properties
from the Temperature-Controlled Logistics Corporation under three triple-net
master leases, as amended. On February 22, 2001, the Temperature-Controlled
Logistics Corporation and AmeriCold Logistics agreed to restructure certain
financial terms of the leases, including a reduction of the rental obligation
for 2001 and 2002, the increase of the Temperature-Controlled Logistics
Corporation's share of capital expenditures for the maintenance of the
properties (effective January 1, 2000) and the extension of the date on which
deferred rent is required to be paid to December 31, 2003. On March 7, 2003, the
Temperature-Controlled Logistics Corporation and AmeriCold Logistics amended the
leases to further extend the date on which deferred rent is required to be paid
to December 31, 2004.
AmeriCold Logistics deferred $32.5 million of the total $115.1 million
of rent payable for the nine months ended September 30, 2003. The Company's
share of the deferred rent was $13.0 million. The Company recognizes rental
income from the Temperature-Controlled Logistics Properties when earned and
collected and has not recognized the $13.0 million of deferred rent in equity in
net income of the Temperature-Controlled Logistics Properties for the nine
months ended September 30, 2003. As of September 30, 2003, the
Temperature-Controlled Logistics Corporation's deferred rent and valuation
allowance from AmeriCold Logistics were $73.1 million and $66.8 million,
respectively, of which the Company's portions were $29.2 million and $26.7
million, respectively.
The Company and Vornado Realty Trust, L.P. have engaged underwriters to
explore additional debt financing alternatives for the Temperature-Controlled
Logistics Corporation. It is anticipated that this financing will be a
non-recourse, secured term loan in an amount in excess of $200 million. If this
financing is obtained, the expected use of proceeds will allow the Company to
make a reduction in its investment in this business and will provide the
business with additional financing for expansion.
VORNADO CRESCENT CARTHAGE AND KC QUARRY, L.L.C.
As of September 30, 2003, the Company held a 56% interest in VCQ. The
assets of VCQ include two quarries and the related land. The Company accounts
for this investment as an unconsolidated equity investment.
On December 31, 2002, VCQ purchased $5.7 million of trade receivables
from AmeriCold Logistics at a 2% discount. The Company contributed approximately
$3.1 million to VCQ for the purchase of the trade receivables. The receivables
were collected during the three months ended March 31, 2003.
On March 28, 2003, VCQ purchased $6.6 million of trade receivables from
AmeriCold Logistics at a 2% discount. VCQ used cash from collection of trade
receivables previously purchased from AmeriCold Logistics and a $2.0 million
contribution from its owners, of which approximately $0.8 million represented
the Company's contribution, for the purchase of the trade receivables. The
receivables were collected during the second quarter of 2003.
On May 22, 2003, VCQ distributed cash of $3.2 million to the Company.
SIGNIFICANT ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, and contingencies as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company evaluates its assumptions and estimates on an
ongoing basis. The Company bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances. These estimates form the basis for making judgments about the
carrying values of assets and liabilities where that information is available
from other sources. Certain estimates are particularly sensitive due to their
significance to the financial statements. Actual results may differ
significantly from management's estimates. The Company
59
believes that the most significant accounting policies that involve the use
estimates and assumptions as to future uncertainties and, therefore, may result
in actual amounts that differ from estimates are the following:
- Valuation for impairment of the Company's assets and investments,
- Relative Fair Value Method/Cost of Sales (Residential Development
entities),
- Capitalization of Interest (Residential Development entities),
- Allowance for doubtful accounts, and
- Allocation of Purchase Price of Acquired Operating Assets.
IMPAIRMENTS. Real estate and leasehold improvements are classified as
long-lived assets held for sale or long-lived assets to be held and used. In
accordance with Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company records assets held for sale at the lower of
carrying value or sales price less costs to sell. For assets classified as held
and used, these assets are tested for recoverability when events or changes in
circumstances indicate that the estimated carrying amount may not be
recoverable. An impairment loss is recognized when expected undiscounted future
cash flows from a Property are less than the carrying value of the Property. The
Company's estimates of cash flows of the Properties require the Company to make
assumptions related to future rental rates, occupancies, operating expenses, the
ability of the Company's tenants to perform pursuant to their lease obligations
and proceeds to be generated from the eventual sale of the Company's Properties.
Any changes in estimated future cash flows due to changes in the Company's plans
or views of market and economic conditions could result in recognition of
additional impairment losses.
If events or circumstances indicate that the fair value of an
investment accounted for using the equity or cost method has declined below its
carrying value and the Company considers the decline to be "other than
temporary," the investment is written down to fair value and an impairment loss
is recognized. The evaluation of impairment for an investment would be based on
a number of factors, including financial condition and operating results for the
investment, inability to remain in compliance with provisions of any related
debt agreements, and recognition of impairments by other investors. Impairment
recognition would negatively impact the recorded value of our investment and
reduce net income.
RELATIVE SALES METHOD AND PERCENTAGE OF COMPLETION. The Company
recognizes earnings from the sale of Residential Development Properties when a
third-party buyer has made an adequate cash down payment and has attained the
attributes of ownership. The cost of residential property sold is defined based
on the type of product being purchased. The cost of sales for residential lots
is generally determined as a specific percentage of the sales revenues
recognized for each Residential Development project. The percentages are based
on total estimated development costs and sales revenue for each Residential
Development project. These estimates are revised annually and are based on the
then-current development strategy and operating assumptions utilizing internally
developed projections for product type, revenue and related development costs.
The cost of sale for residential units (such as townhomes and condominiums) is
determined using the relative sales value method. If the residential unit has
been sold prior to the completion of infrastructure cost, and those uncompleted
costs are not significant in relation to total costs, the full accrual method is
utilized. Under this method, 100% of the revenue is recognized and a commitment
liability is established to reflect the allocated estimated future costs to
complete the residential unit. If the Company's estimates of costs or the
percentage of completion is incorrect, it could result in either an increase or
decrease in cost of sales expense or revenue recognized and therefore, an
increase or decrease in net income.
CAPITALIZATION OF INTEREST. The Company commences capitalization of
interest when development activities and expenditures begin and ceases to
capitalize interest upon "completion," which is defined as the time when the
asset is ready for its intended use. The Company uses judgment in determining
the time period over which to capitalize such interest and these assumptions
have a direct impact on net income because capitalized costs are not subtracted
in calculating net income. If the time period is extended, more interest is
capitalized, thereby increasing net income.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company's accounts receivable
balance is reduced by an allowance for amounts that may become uncollectible in
the future. The Company's receivable balance is composed primarily of rents and
operating cost recoveries due from its tenants. The Company also maintains an
allowance for deferred rent receivables which arise from the straight-lining of
rents. The allowance for doubtful accounts is reviewed at least quarterly for
adequacy by reviewing such factors as the credit quality of the Company's
tenants, any delinquency in payment, historical trends and current economic
conditions. If the assumptions regarding the collectibility of accounts
receivable prove incorrect, the Company could experience write-offs in excess of
its allowance for doubtful accounts, which would result in a decrease in net
income.
ACQUISITION OF OPERATING PROPERTIES. The Company allocates the purchase
price of acquired properties to tangible and identified intangible assets
acquired based on their fair values in accordance with SFAS No. 141, "Business
Combinations."
60
In making estimates of fair value for purposes of allocating purchase
price, management utilizes sources, including, but not limited to, independent
value consulting services, independent appraisals that may be obtained in
connection with financing the respective property, and other market data.
Management also considers information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based
on the sum of (i) the value of the property as if it were vacant and available
to lease at the purchase date and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements and equipment. The contributory value of tenant improvements is
separately estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on
the difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired
properties are calculated based on the present value (using a market interest
rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease for above-market leases and the initial term
plus the term of the below-market fixed rate renewal option, if any, for
below-market leases. The Company performs this analysis on a lease by lease
basis. The capitalized above-market lease values are amortized as a reduction to
rental income over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values are amortized as an increase to rental
income over the initial term plus the term of the below-market fixed rate
renewal option, if any, of the respective leases.
Management estimates costs to execute leases similar to those acquired
at the property at acquisition based on current market conditions. These costs
are recorded based on the present value of the amortized in-place leasing costs
on a lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and the Company's overall relationship with that respective customer.
Characteristics considered by management in allocating these values include the
nature and extent of the Company's existing business relationships with the
customer, growth prospects for developing new business with the customer, the
customer's credit quality and the expectation of lease renewals, among other
factors. The in-place lease value and customer relationship value are both
amortized to expense over the initial term and any renewal periods in the
respective leases, but in no event does the amortization period for the
intangible assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and the customer relationship value would be charged to expense.
ADOPTION OF NEW ACCOUNTING STANDARDS
SFAS NO. 145. In April 2002, the FASB issued SFAS No. 145, "Rescission
of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 requires the reporting of gains and losses
from early extinguishment of debt be included in the determination of net income
unless criteria in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations," which allows for extraordinary item classification, are
met. The provisions of this Statement related to the rescission of Statement No.
4 are to be applied in fiscal years beginning after May 15, 2002. The Company
adopted this Statement for fiscal 2003 and expects no impact in 2003 beyond the
classification of costs related to early extinguishments of debt, which were
shown in the Company's 2001 Consolidated Statements of Operations as an
extraordinary item.
SFAS NOS. 148 AND 123. In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," effective
for fiscal years ending after December 15, 2002, to amend the transition and
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." In addition to the prospective transition method of accounting
for Stock-Based Employee Compensation using the fair value method provided in
SFAS No. 123, SFAS No. 148 permits two additional transition methods, both of
which avoid the ramp-up effect arising
61
from prospective application of the fair value method. The Retroactive
Restatement Method requires companies to restate all periods presented to
reflect the Stock-Based Employee Compensation under the fair value method for
all employee awards granted, modified, or settled in fiscal years beginning
after December 15, 1994. The Modified Prospective Method requires companies to
recognize Stock-Based Employee Compensation from the beginning of the fiscal
year in which the recognition provisions are first applied as if the fair value
method in SFAS No. 123 had been used to account for employee awards granted,
modified, or settled in fiscal years beginning after December 15, 1994. Also, in
the absence of a single accounting method for Stock-Based Employee Compensation,
SFAS No. 148 expands disclosure requirements from those existing in SFAS No.
123, and requires disclosure of whether, when, and how an entity adopted the
preferable, fair value method of accounting.
Effective January 1, 2003, the Company adopted the fair value expense
recognition provisions of SFAS No. 123 on a prospective basis as permitted,
which requires that the value of stock options at the date of grant be amortized
ratably into expense over the appropriate vesting period. During the nine months
ended September 30, 2003, the Company granted stock options and recognized
compensation expense that was not significant to its results of operations. With
respect to the Company's stock options which were granted prior to 2003, the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations ("APB No. 25"). Under APB No.
25, compensation cost is measured as the excess, if any, of the quoted market
price of the Company's common shares at the date of grant over the exercise
price of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. During the nine months ended
September 30, 2003, no compensation cost was recognized for grants of stock
options made prior to 2003 under the Plans because the Company's policy is to
grant stock options with an exercise price equal to the quoted closing market
price of the Company's common shares on the grant date. Had compensation cost
for the Plans been determined based on the fair value at the grant dates for
awards under the Plans consistent with SFAS No. 123, the Company's net (loss)
income and (loss) earnings per share would have been reduced to the following
pro forma amounts:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
- ------------------------------------------- --------- ---------- ---------- --------
Net (loss) income available to common
shareholders, as reported $ (3,305) $ 21,174 $ (28,688) $ 38,487
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards (700) (1,011) (2,301) (3,087)
--------- ---------- ---------- --------
Pro forma net (loss) income $ (4,005) $ 20,163 $ (30,989) $ 35,400
(Loss) earnings per share:
Basic - as reported $ (0.03) $ 0.20 $ (0.29) $ 0.37
Basic - pro forma $ (0.04) $ 0.19 $ (0.31) $ 0.34
Diluted - as reported $ (0.03) $ 0.20 $ (0.29) $ 0.37
Diluted - pro forma $ (0.04) $ 0.19 $ (0.31) $ 0.34
SFAS NO. 149. In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The Company adopted SFAS
149 effective July 1, 2003. The adoption of this Statement did not have a
material impact on the Company's financial condition or its results of
operations.
SFAS NO. 150. In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer should classify
and measure certain financial instruments that have both liability and equity
characteristics. Most provisions of this Statement were to be applied to
financial instruments entered into or modified after May 31, 2003 and to
existing instruments as of the beginning of the first interim financial
reporting period after June 15, 2003. On October 29, 2003, the FASB agreed to
defer indefinitely the application of the provisions of SFAS No. 150 to
noncontrolling interests in limited life subsidiaries.
FASB INTERPRETATION 45. In November 2002, the FASB issued
Interpretation 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
which elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations
62
under certain guarantees that it has issued and liability-recognition
requirements for a guarantor of certain types of debt. The new guidance requires
a guarantor to recognize a liability at the inception of a guarantee which is
covered by the new requirements whether or not payment is probable, creating the
new concept of a "stand-ready" obligation. Initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. See Note 11, "Commitments and
Contingencies" in Item 1, "Financial Statements," for disclosure of the
Company's guarantees at September 30, 2003. The Company adopted FIN 45 effective
January 1, 2003.
FASB INTERPRETATION 46. On January 15, 2003, the FASB approved the
issuance of Interpretation 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." Under FIN 46, consolidation requirements
are effective immediately for new Variable Interest Entities ("VIEs") created
after January 31, 2003. The consolidation requirements apply to existing VIEs
for financial periods ending after December 15, 2003. VIEs are generally a legal
structure used for business enterprises that either do not have equity investors
with voting rights, or have equity investors that do not provide sufficient
financial resources for the entity to support its activities. The objective of
the new guidance is to improve reporting by addressing when a company should
include in its financial statements the assets, liabilities and activities of
another entity such as a VIE. FIN 46 requires a VIE to be consolidated by a
company if the company is subject to a majority of the risk of loss from the
VIE's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about VIEs that the company is
not required to consolidate but in which it has a significant variable interest.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the VIE was established. These
disclosure requirements are as follows: (a) the nature, purpose, size, and
activities of the VIE; and, (b) the enterprise's maximum exposure to loss as a
result of its involvement with the VIE. FIN 46 may be applied prospectively with
a cumulative effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative effect adjustment as of the beginning of the first year restated. The
Company is assessing the impact of this Interpretation, if any, on its existing
entities and does not believe the impact will be significant on its liquidity,
financial position, and results of operations. The Company did not create any
VIEs subsequent to January 31, 2003.
FUNDS FROM OPERATIONS AVAILABLE TO COMMON SHAREHOLDERS
FFO, as used in this document, means:
- Net Income (Loss) - determined in conformity with GAAP;
- excluding gains (losses) from sales of depreciable operating
property;
- excluding extraordinary items (as defined by GAAP);
- including depreciation and amortization of real estate assets;
and
- after adjusting for unconsolidated partnerships and joint
ventures.
The Company calculates FFO available to common shareholders in the same
manner, except that Net Income (Loss) is replaced by Net Income (Loss) Available
to Common Shareholders.
NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. The Company considers FFO
available to common shareholders an appropriate measure of performance for an
equity REIT and FFO an appropriate measure of performance for its investment
segments. However, FFO available to common shareholders and FFO should not be
considered as alternatives to net income determined in accordance with GAAP as
an indication of the Company's operating performance.
The Company has historically distributed an amount less than FFO
available to common shareholders, primarily due to reserves required for capital
expenditures, including leasing costs. The aggregate cash distributions paid to
shareholders and unitholders for the nine months ended September 30, 2003 and
2002 were $131.6 million, and $132.5 million, respectively. The Company reported
FFO available to common shareholders of $121.3 million and $167.3 million for
the nine months ended September 30, 2003 and 2002, respectively.
An increase or decrease in FFO available to common shareholders does
not necessarily result in an increase or decrease in aggregate distributions
because the Company's Board of Trust Managers is not required to increase
distributions on a quarterly basis unless necessary for the Company to maintain
REIT status. However, the Company must distribute 90% of its REIT taxable income
(as defined in the Code). Therefore, a significant increase in FFO available to
common shareholders will generally require an increase in distributions to
shareholders and unitholders although not necessarily on a proportionate basis.
63
Accordingly, the Company believes that to facilitate a clear
understanding of the consolidated historical operating results of the Company,
FFO available to common shareholders should be considered in conjunction with
the Company's net income and cash flows reported in the consolidated financial
statements and notes to the consolidated financial statements. However, the
Company's measure of FFO available to common shareholders may not be comparable
to similarly titled measures of other REITs because these REITs may apply the
definition of FFO in a different manner than the Company.
CONSOLIDATED STATEMENTS OF FUNDS FROM OPERATIONS AVAILABLE TO COMMON
SHAREHOLDERS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---------- ----------- ---------- -----------
(in thousands)
Net income (loss) $ 3,270 $ 27,749 $ (8,963) $ 53,661
Adjustments to reconcile net income (loss)
to funds from operations available to common
shareholders:
Depreciation and amortization of real estate assets 39,617 36,419 109,017 102,088
Loss (gain) on property sales, net 14 (19,646) 719 (25,311)
Cumulative effect of a change in accounting
principle - - - 9,172
Impairment charges related to real estate assets 2,356 - 20,374 2,048
Adjustment for investments in unconsolidated
companies:
Office Properties (1,613) 1,946 3,805 5,997
Resort/Hotel Properties 394 370 1,143 370
Residential Development Properties 8 (615) 235 2,339
Temperature-Controlled Logistics Properties 5,147 6,777 16,143 18,278
Other 260 96 178 5,872
Unitholder minority interest 585 3,491 (1,605) 8,004
Series A Preferred share distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred share distributions (2,019) (2,019) (6,057) (3,028)
---------- ----------- ---------- -----------
Funds from operations available to common
shareholders before impairment charges related
to real estate assets (1) 43,463 50,012 121,321 167,344
========== =========== ========== ===========
Impairment charges related to real estate assets (2,356) - (20,374) (2,048)
Funds from operations available to common
shareholders after impairment charges related
to real estate assets $ 41,107 $ 50,012 $ 100,947 $ 165,296
========== =========== ========== ===========
Investment Segments:
Office Segment $ 73,855 $ 88,045 $ 216,126 $ 249,119
Resort/Hotel Segment 11,471 13,593 39,458 47,140
Residential Development Segment 2,773 4,319 13,766 32,354
Temperature-Controlled Logistics Segment 4,198 3,675 16,294 14,450
Other:
Corporate general and administrative (7,926) (8,121) (20,526) (19,846)
Corporate and other adjustments:
Interest expense (43,074) (47,149) (129,380) (135,871)
Series A Preferred share distributions (4,556) (4,556) (13,668) (12,146)
Series B Preferred share distributions (2,019) (2,019) (6,057) (3,028)
Other (2) 8,741 2,225 5,308 (4,828)
---------- ----------- ---------- -----------
Funds from operations available to common
shareholders before impairment charges related
to real estate assets (1) 43,463 50,012 121,321 167,344
========== =========== ========== ===========
Impairment charges related to real estate assets (2,356) - (20,374) (2,048)
Funds from operations available to common
shareholders after impairment charges related
to real estate assets $ 41,107 $ 50,012 $ 100,947 $ 165,296
========== =========== ========== ===========
Basic weighted average shares 99,172 103,766 99,186 104,527
========== =========== ========== ===========
Diluted weighted average shares and units (3) 116,929 117,070 116,941 118,225
========== =========== ========== ===========
- --------------------------
(1) To calculate basic funds from operations available to common shareholders,
deduct unitholder minority interest.
(2) Includes interest and other income, behavioral healthcare property income,
preferred return paid to GMACCM in 2002, other unconsolidated companies,
less depreciation and amortization of non-real estate assets and
amortization of deferred financing costs, income from investment land
sales, net, and other expenses.
(3) See calculations for the amounts presented in the reconciliation following
this table.
64
The following schedule reconciles the Company's basic weighted average
shares to the diluted weighted average shares/units presented above:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------
(shares/units in thousands) 2003 2002 2003 2002
- --------------------------- ------- ------- ------- -------
Basic weighted average shares: 99,172 103,766 99,186 104,527
Add: Weighted average units 17,747 13,183 17,750 13,183
Share and unit options 10 121 5 515
------- ------- ------- -------
Diluted weighted average shares and units 116,929 117,070 116,941 118,225
======= ======= ======= =======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in the Company's market risk occurred from December
31, 2002 through September 30, 2003. Information regarding the Company's market
risk at December 31, 2002 is contained in Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports under the Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and its Chief Financial and Accounting
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-15(e) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of September 30, 2003, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including its Chief Executive Officer and its Chief Financial and Accounting
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and its Chief Financial and Accounting Officer concluded that
the Company's disclosure controls and procedures were effective.
During the three months ended September 30, 2003, there was no change
in the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
65
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2003, the Company issued an
aggregate of 2,110 common shares to holders of Operating Partnership units in
exchange for 1,055 units. The issuances of common shares were exempt from
registration as private placements under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"). The Company has registered the resale
of such common shares under the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
(b) Reports on Form 8-K
Form 8-K dated November 3, 2003, furnished November 4, 2003,
for the purpose of reporting, under Item 12 - Results of Operations and
Financial Condition, the Company's 2003 third quarter earnings and
related financial, operating and statistical information.
66
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRESCENT REAL ESTATE EQUITIES COMPANY
(Registrant)
By /s/ John C. Goff
----------------------------------------
John C. Goff
Date: November 6, 2003 Vice-Chairman of the Board and Chief
Executive Officer
By /s/ Jerry R. Crenshaw, Jr.
-----------------------------------------
Jerry R. Crenshaw, Jr.
Executive Vice President and Chief
Financial Officer
Date: November 6, 2003 (Principal Financial and Accounting
Officer)
67
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ---------------------------------------------------------------------------------
3.01 Restated Declaration of Trust of Crescent Real Estate Equities Company, as
amended (filed as Exhibit No. 3.01 to the Registrant's Current Report on Form
8-K filed April 25, 2002 (the "April 2002 8-K") and incorporated herein by
reference)
3.02 Second Amended and Restated Bylaws of Crescent Real Estate Equities Company
(filed as Exhibit No. 3.02 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003 and incorporated herein by reference)
4.01 Form of Common Share Certificate (filed as Exhibit No. 4.03 to the Registrant's
Registration Statement on Form S-3 (File No. 333-21905) and incorporated herein
by reference)
4.02 Statement of Designation of 6-3/4% Series A Convertible Cumulative Preferred
Shares of Crescent Real Estate Equities Company dated February 13, 1998 (filed as
Exhibit No. 4.07 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 10-K") and incorporated herein by
reference)
4.03 Form of Certificate of 6-3/4% Series A Convertible Cumulative Preferred Shares of
Crescent Real Estate Equities Company (filed as Exhibit No. 4 to the
Registrant's Registration Statement on Form 8-A/A filed on February 18, 1998 and
incorporated by reference)
4.04 Statement of Designation of 6-3/4% Series A Convertible Cumulative Preferred
Shares of Crescent Real Estate Equities Company dated April 25, 2002 (filed as
Exhibit No. 4.1 to the April 2002 8-K and incorporated herein by reference)
4.05 Statement of Designation of 9.50% Series B Cumulative Redeemable Preferred Shares
of Crescent Real Estate Equities Company dated May 13, 2002 (filed as Exhibit No.
2 to the Registrant's Form 8-A dated May 14, 2002 (the "Form 8-A") and
incorporated herein by reference)
4.06 Form of Certificate of 9.50% Series B Cumulative Redeemable Preferred Shares of
Crescent Real Estate Equities Company (filed as Exhibit No. 4 to the Form 8-A and
incorporated herein by reference)
*4 Pursuant to Regulation S-K Item 601 (b) (4) (iii), the Registrant by this filing
agrees, upon request, to furnish to the Securities and Exchange Commission a copy
of instruments defining the rights of holders of long-term debt of the Registrant
10.01 Third Amended and Restated Agreement of Limited Partnership of Crescent Real
Estate Equities Limited Partnership, dated as of January 2, 2003, as amended
(filed herewith)
31.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a - 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith)
32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
68